With South Africa on the edge of stagflation, real estate sees promise.
Economists argue that South Africa is on the brink of stagflation as increased levels of inflation, high-interest rates, stagnant local economic growth and high unemployment persist.
Antonie Goosen, the founder of Meridian Realty, said that if this is to be the case, then real estate is an effective way of storing value. Goosen said that the slowdown accompanied by stagflation would lead to fewer people being involved in economic activity, pushing GDP down alongside corporate profits.
This places pressure on the equity market, and this is where real estate will store its value, he added. Real estate has traditionally been effective in the long term, and paired with inflationary pressure, the increased cost of raw materials, goods, and labour are passed on – increasing the value of properties.
“During periods of stagflation, building contractors will continue to expand their construction of homes to meet consumer demand.
Stagflation does not decrease demand for homes; however, it causes supply to stagnate and reduces the affordability of completed houses.”
According to Goosen, the physical number of completed building projects slows – a disadvantage to contractors but an advantage for existing homeowners.
“These variables mean that their homes are in greater demand and will appreciate.”
There are fewer prospective home buyers as the government attempts to slow down inflation. Given the effects of the Covid-19 pandemic, many building materials have increased in cost while wages have remained constant. This feature makes it difficult for new homes to be priced affordably.
The South African Reserve Bank’s Monetary Policy Committee (MPC) hiked the repurchase rate (repo rate) by 75 basis points in Septmeber. The increase means that the repo rate is now at 6.25% per year, with prime now at 9.75%.
With this prime lending rate, homeowners might have to look at ways to minimise the effect on their bond repayment. Property pegged at a fixed-rate mortgage is safer because it is immune to inflation, said Goosen.
He added that real estate owners who buy homes with mortgages would gain value through the high inflation experienced during stagflation. It also allows homeowners to charge higher rentals regardless of the stagnating economy.
“A higher valuation in inflation-adjusted terms may stagnate at first, but after five years, the home will return to its actual market value.”
According to the September 2022 FNB Property Barometer, the steeper-than-expected interest rate hikes suggest a less supportive environment for home-buying activity. The data concurs with this in the lower- and middle-income market.
At the moment, property stock shortages continue, but high demand across the spectrum of properties has started to ease slightly as interest rates have risen. However, this is not to the level that one might have expected.
Meridian Realty reported that the high-end market is impacted less by changes in the interest rate. “Sellers can wait to get the price they want, and buyers have less stock to choose from but are prepared to pay the asking price.”
Goosen said that the group sees continued demand in the high-end market and in properties purchased as part of the high-end semigration trend.
“We are not yet in a situation of stagflation in the property market in South Africa. True stagflation in real estate happens when buyers are not able to buy, and sellers are unable to sell,” said Goosen.