Property Talk

To recognize good news you have to understand bad news. The property market is currently in an exceptionally good place and poised for further growth in 2015. Importantly, you have to consider where we have come from since 2008 to understand why it is possible to predict a robust next twelve months in our property market cycle. In 2008 oil prices peaked at US$145/barrel, having been around US$75/barrel a year before.

In addition, Rand exchange rate weakness at the time further exacerbated the condition and we saw the IMF Global Energy Commodity Index inflation rate peak at 112,7% in June 2008. Food prices surged, partially due to switching crops away from food production to ethanol production, and the IMF Food Commodity Price Index peaked at 60,8% in June 2008. Our local CPI inflation peaked at 13,7% in August 2008 and our prime interest rate was as high as 15,5% between June and December of 2008. Our economy was thrust into recession with the rest of the world. The global financial crisis took hold as the bubble in market for residential homes burst, which had been fueled by irresponsible lending. Locally the availability of finance evaporated and the demand for property fell off a cliff.

This scenario was well described as a perfect storm for residential property. Our current situation is a dramatically reduced oil price - Brent Crude Oil traded at US$72 on 1/12/2014, and although these prices can be erratic the current over supply in world oil markets is expected to keep prices around the US$80/barrel level. Global Food Price inflation is down to 2,6% and our local inflation outlook for 2015 is predicted by FNB to average 5,2%. This in turn implies that the Reserve Bank is less likely to raise interest rates by much and the expectation is now that our prime interest rate will rise by less than 1% over the next twelve months from its current 9,25% to 10%. And now for the really good news: The latest StatsSA figures on building plans passed for September 2014 indicated a 25,5% increase, which took the third quarter growth in new building plans passed to 19,2%, dramatically up from 0,55% in the second quarter.

The developers are definitely back in force and 2015 can be expected to see a significant increase in building activity. FNB are predicting that the square metreage of building completions will increase by 23,6% in 2015. What I find interesting is the gap between square metres worth of plans approved and square metres of buildings completed. As an example for 2013, over 6,65 million square metres of residential building plans were approved in South Africa and 4,88 million square metres completed. For this period the "missing" square metres represented 26,49% of the amount approved. By analyzing the 2012 and 2011 figures we get similar results of around 25% or a quarter of approved building plans are out there in the pipeline. This helps us to understand that a surge in approved plans is likely to result in future building activity, but approximately one quarter will be delayed in terms of moving from approved status to completed.

What all this means for our residential property market is that new off-plan sales activity and the release of new residential projects along our north coast will increase substantially over the next twelve months. Land will become increasingly scarce and this will drive pricing upwards. Suppliers of building materials and home maintenance and improvement service providers are in for a busy time. Estate agents should be happy as demand increases further and new supply comes on stream.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Seeff KZN Chairman

Principal - Seeff Dolphin Coast

andreasw@seeff.com