What will happen to the Property market in 2020?

I have had a few clients ask me what I think the market is going to do in this post lockdown period, over the next three months and post Covid-19… Whenever that may be.

Should they buy? Should they wait? Should they sell 

I wish I had a crystal ball. This exercise would have been very easy.
We don’t so we have to make educated guesses.

I want to break it down into Long term (2 years plus) and Short term (0-18 months)

Properties in Graanendal

Disclaimer:

Although I had economics in School and studied international trade for three years I am by no means a financial service provider or future predictor.
I have a huge interest in World politics and economics and follow quite variety of people and sources.
We have some really clued-up people in at our local Keller Williams offices in South Africa and we can track data from all our offices stretched out over five continents.

Property pricing in the Long Term

The first thing that we have to realise is that we are flying blindly.

Yes, the world has been through two recessions in recent years, but in modern times the world has not been shut down as it has currently since the Second World War.
So although we can look back at the previous two recessions, we cannot base our predictions on their outcomes.

Most of us will agree that another recession might be waiting in the wings. Not only in South Africa, but globally.

So the next obvious questions are then:

How long before things will be back to normal?

How will the price levels and sale volumes be impacted by this coming recession?

There is a saying that if the US sneezes the rest of the world gets a cold.
So with the Unites States being the biggest player in the world economy (for now)
I decided to work from their data. The US has had five recessions since I've been alive (I was born in 1977).

Below is a chart of the average real estate house price change that happened during and after each recession

I don’t want to get too technical and go in-depth, but I would like to quickly look at the last two recessions, the reasons it occurred and the time it took to recover.

2000/1

Dot.com & 9/11

This recession was started by the underlying Dotcom crash but was probably really triggered by what happened in NYC on  9/11. This was essentially an “event

2008

US Housing bubble

As you can see , 2008 was brutal on the housing market.  

We all know that US Housing market (Subprime mortgage crisis) as the big reason for the recession so it makes sense that this industry would take such a huge pounding.

What is interesting is that the recession had opposite effects on the house market as well as price levels. So for us to immediately think that this recession will create an immediate slump in price levels might be a bit presumptuous.

The Other question people are asking?

What type of recession will we have?
V, U or L Shaped.

Two studies have been done that look at how an econonmy has recovered from previous pandemics

Here are the conclusions they reached:

“Historical analysis showed us that pandemics are usually V-shaped (sharp recessions that recover quickly enough to provide little damage to home prices), and some very cutting-edge search engine analysis by our Information Management team showed the current slowdown is playing out similarly thus far.”

- John Burns consulting

“It’s worth looking back at history to place the potential impact path of Covid-19 empirically. In fact, V-shapes monopolize the empirical landscape of prior shocks, including epidemics such as SARS, the 1968 H3N2 (“Hong Kong”) flu, 1958 H2N2 (“Asian”) flu, and 1918 Spanish flu.”

- Harvard Business Review

Properties in Graanendal

My hope:

Based in this we all hope for a V-shape recovery but all will depend on how fast the virus is brought under control,  when consumers will have dependable income and also to actually have  confidence to spend and get the economy going again. 

Compared to the rest of the world property prices in South Africa is still far under-valued. 

Compare what you can buy in Durbanville for R3m versus what you can buy in London for £150 000

 

Compared to other parts of Cape Town, the Northern Suburbs still provides great value.

property prices in the short term

This has been a huge shock for people all over the world. People will react in different ways.
Not only in the real estate sector but across all industries.
Most of us understand supply and demand and I believe this will have the biggest impact on pricing in the next 6 to 12 months.

What was happening in 2019 and Beginning of 2020

Before March 2020 we were in what you would call a “Buyer’s Market” in South Africa.
Practically, this meant that in the Northern Suburbs of Cape Town there were a LOT more properties in the market than there were buyers.

"4 Months"

Properties stayed on the market until the price was adjusted to where buyers felt that the properties were correctly priced and a transaction happened 

Before lockdown this meant an average of four months and one day.

"Expire"

Property prices stayed too high and eventually the properties were taken off the market 

We call it expired listings.

Supply and Demand explained

To understand and predict the immediate future we have to understand the concept of supply and demand and the impact that will have on pricing

As with all markets (products, industries and areas) there is a universal concept that when supply outnumbers demand prices go down.

When demand outnumbers supply then prices go up.

What will influence Supply?

With the cash-flow crunch coming over the next few months because of our South African economy shrinking, it will be interesting to see whether more people sell property to help their cash-flow.

With uncertainty over tenant's future ability to keep paying rent some landlords may want to minimise risk until uncertainty disappears.

Some of my clients were families that were looking to emigrate out of South Africa. With all the uncertainty (jobs, Visas and travel bans) this has been put on hold.

Investors: With all the uncertainty worldwide which meant price levels dipped across most sectors some of their plans may have been on hold and they are not as motivated to sell which may mean a temporary dip in supply.

What will influence DEMAND?

As is the case with all major events that scare consumers the demand is going to come down. We have seen this in most industries.

Not only will people be scared to spend money because of uncertainty, but many will have lost a lot of income and won’t have the ability to spend money.

Banks may also become more risk averse with stricter lending conditions and limits which may affect the buyer pool.

In certain price brackets we may see investors with cash waiting for the correct opportunities

Favourable lending rates might bring some new buyers to the market

CONCLUSION:

Logic and data pulled from our market centres over the world is showing us that demand Is decreasing and will be decreasing on the near future.  What would be interesting to see is what will happen supply side (listings) after the hard lockdown. 

At the moment everything is on "pause" mode.  Will we see a flooding of properties on the market?  Only time and hindsight will give us the answer in the coming months.

Is it all doom and gloom?

Time will tell how this pandemic affected South Africa’s property market, but personally I don’t think it is all doom and gloom.

Based on the current info available I think that although demand will decrease, supply might stay the same which hopefully will not create carnage in the market.

For sellers this is bad news as prices might be down.

For buyers this is great news. (Especially investors with cash on hand or access to funds)

 

 

But, if you are both (buyer and seller),  this might not be a bad spot to be in (depending on you specific circumstances).

Yes, you potentially might get 10% less than in a normal market, BUT this means you might also save 10% on the property you are upgrading to. 

The fact that the interest rate has dropped by 2% not only means more affordability for buyers, but it also means that you can buy a lot more house for your budget.

 

Every situation is unique and depending on YOUR industry and yourfinancial position. 


Obviously do you research and make sure your work is “recession proof” before committing to a large debt payment.

If you are thinking of selling, What now?

It is possible

Even in lockdown, Keller Williams (in South Africa and abroad) has continued to market, facilitate and conclude real-estate transactions.

We are waiting for the deeds office to open to process transactions already in our system.

We can’t wait for level 3 to be able to service our clients again but in the meantime keep these four things in mind.

1 product

Make sure your house is in the best possible shape. 

Start with the “low hanging fruit” and only spend money on that which you know you will get a ROI on.

2 Pricing

Understand the concept of Supply and demand. 

Decide on your timeframe.

Price accordingly keeping in mind the other properties you “compete” with.

3 Promotion

Have tech, Visual and digital marketing focused marketing plan that includes:
– Virtual reality tours,
– quality photos
– professional video.

4 Distribution

Mae sure that the maximum amount or qualified buyers “sees” your house.

– Traditional Electronic platforms
– Agent network
– Social media

Come on South Africa!

If we are lucky, the world may get this virus under control soon and get our people working again.

I think there are lots of opportunities for investors at the moment, but we have to make wise decisions, whether we are buying or selling.

If you have any property-related questions, contact me now.
Even if it is just to give your input or opinion on the market!

Riekert
+2782 556 7427
riekert.cloete@kwsa.co.za 

If you have any questions, need a virtual property valuation or want to subscribe to my newsletter please get in touch!