Property Talk

Author: Andreas Wassenaar
Date: 2016-06-24

Warren Buffet is famous for saying, "Risk comes from not knowing what you're doing". Risk management would therefore involve finding out everything you can about what impacts on the various aspects of any given market - such as property, and to apply the practical knowledge when in the market to buy or sell. For those in the market to buy residential property, your timing could not be better as the general macro-economic environment tightens and financial pressure starts to become more evident throughout the economy. Economic contractions represent danger for many but opportunity for those who recognize and plan for the buying opportunities they create. The wonderful thing about scarcity is that it drives pricing, even in a down market. Prime residential property typically remains prime for long periods of time. The idea of always buying for location therefore does make a lot of sense, even at the premium pricing a superior location can command.

The latest Consumer Confidence Index figures shows strong negative growth and translates directly and quickly into our overall household consumption expenditure. This makes sense as people spend less when they have less confidence. Even though the growth in real household disposable income has slowed from 2,5% in the 1st quarter of 2015 to 1,5% in the 1st quarter of 2016, the growth in real consumption expenditure has slowed even faster to -1,3% on a quarterly basis. Overall South Africans have become more conservative in their spending habits recently. It is interesting to see that the growth in expenditure on durables (such as vehicles and washing machines) has declined dramatically by -8.9% over the first quarter of 2016 when measured year-on-year. If you are selling vehicles or white goods at Hirsch you may well have first hand experience of these tougher market conditions with people simply deciding to postpone the purchase. By spending less households hang on to their disposable income. With mortgage debt growth being flat, our key measurement of Mortgage Debt to Disposable income and Total Debt to Disposable Income measurements have been declining. Mortgage Debt to disposable income is currently around 35,1% as at the 1st quarter of 2016. Total Debt to Disposable Income is down to 76,6% currently from the 2008 peak of 87,8%. Although still relatively high, it does show that South Africans have strengthened their balance sheets over the past few years and are in fact better prepared to weather financial storms as they may arise. When considering consumer credit health, it is useful to have a look at the underlying factors that have a direct impact on consumer creditworthiness. The prime interest rate has increased from 8,5% to 10,5% over the past three years and this places an additional burden on household finances. This burden can be measured in terms of the Household Sector Debt-Service Ratio, which measures the interest cost as a percentage of disposable income. This ratio has moved up from 8,5% to 9,7%. Almost 10% of the disposable income of households is therefore going to simply cover the interest portion on their debt.

Insolvencies track this ratio accurately. It is almost certain therefore that insolvencies will increase in line with the increase in this ratio over the next 12-24 months. The TransUnion Consumer Credit Health Index provides a very useful view of the overall consumer credit health trend. This Index recently dropped below the 50 level to 46,1 which indicates a deterioration in consumer credit health. This has implication for Landlords in managing their tenants and their ability to pay their rentals. It is time to be ultra cost conscious and to be wide awake to the opportunities that will present themselves.

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

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com

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