South Africa and Property in 2016

Warning! This is simply a forecast based on an analysis of the evidence at hand not a prophecy. If I could see into the future I would not be typing this post. I’d probably be on my own tropical island sleeping on a big pile of money

We’ve all had enough time to break our New Year resolutions and the memories, if not the heat, of the summer vacation and festive season are beginning to fade. That means it is time to take a look at the year ahead and ask “What will 2016 have in store for us?”

Compared to 2014 and 2015, 2016 will be an even more volatile time with very, very few bright spots (economically speaking). If you are living beyond or close to the limit of your means you MUST seriously consider adjusting your lifestyle and becoming more frugal. Interest rates will rise as will prices and unemployment. If you are caught in a perfect storm of sudden unemployment while having significant unserviceable debts you will likely find little relief as South Africa’s economy will be facing at least two very lean years.

Now let’s take a look at what I’ve identified as the factors that pose the greatest challenge to our economy and how they will shape the year to come. Warning: it is rather gloomy!

2016-01-25 18.07.53

2016: Not much light in this tunnel

2016 prognostications in brief:

Weak Rand: Rand will remain weak, possibly dropping to R20 to the US Dollar in 2016. This will push up the cost of imports driving up the cost of living.

Global Downturn: Emerging markets, like South Africa, will continue to be hammered by capital outflows and sustained low commodity prices. There will be job losses and there will be strikes and protests.

Drought: I believe that if the drought continues through 2016 (as it is predicted to) we will see an uptick in migration to cities and increasing political unrest in the face of job losses and rising food prices. Our neighbours might experience far worse disruptions (like famine) which will see refugees streaming into SA.

Eskom: Load-shedding unlikely but problems with Eskom far from over. Whatever else happens power prices will rise. We’re just holding our breath to see by how much.

Cost of Living: Credit will be more expensive. And food prices will rise so fast that the nostalgic longing for the “good old days when things were so much cheaper” will be referring to weeks, not years, back.

Politics & Unrest: It is an election year. Expect unrest as prices rise and direct or indirect interference in the economy. This year, more than any other since 1994, will shape the future of South Africa.

Now, in detail:

The weak Rand

It is an unfortunate reality that the vast majority of South Africans have few investments and so care little for the performance of the JSE. Even fewer are likely to be travelling overseas anytime soon and aren’t watching currency tickers in horror. But that doesn’t mean that only the wealthy need worry about the weakened Rand!

The vast majority of imports are paid for in foreign currency. And within a matter of weeks the price of many of those imports rose over 25%. Rand weakness and our government’s insatiable desire for taxes will also eliminate any benefit we might have derived from oil prices, now close to 75% less than they were 5 years ago.

All these costs will very soon be passed onto the consumer. Expect prices to inflate dramatically in the first quarter of 2016 as the reality of the weakened Rand strikes home.

Of course there might be small benefits in certain sectors as the Rand remains weak. Tourists might choose SA over other more expensive destinations. Local miners and farmers might see an improvement in their revenue as they convert foreign currencies to Rand. But hotels are stocked with foreign products (from booze to TVs), mines rely on foreign parts to keep machinery operational and more produce being shipped overseas means price increases locally. So, generally speaking, there is no upside to this level of weakness in the Rand.

Will the Rand improve? Unlikely: President Zuma’s dismissal of Finance Minister Nene was, arguably, harshly punished by the market but the reality is that the JSE and Rand were on the decline long before that baffling week in December 2015.

This misstep served to exacerbate an already bleak situation and, in the face of waning investor confidence globally, could not have come at a worse time. The Zuma government seems unwilling and/or unable to offer any solutions or reassurances.

The return of the respected, experienced Mr Gordhan to the position of Finance Minister has prevented a complete rout but he has little room to maneuver and we will probably see R20 to the US Dollar before the end of the 2nd Quarter.

Global Market Forces

Rand weakness and the JSE rout are not solely the fault of President Zuma’s administration: there is a global trend away from emerging economies (like our own) and commodity prices, seen as a major driver, have collapsed as part of a ‘normal’ economic cycle.

That being said, policy has certainly failed to shield us from the worst effects of this cycle and government action (and inaction) has hindered more than encouraged investment. The true extent of the damage will become apparent in the months to come. In all likelihood mines will continue to close and many more jobs will be lost in this sector.

While mining is not as important to the economy as it once was this will still have a knock on effect as support industries close along with mines. And don’t forget the shops and services that rely on sales to mine employees.

There will be protests and strikes related to this and with little wiggle room for business means that they might be protracted and very disruptive. Leading to further weakening in the mining sector specifically and the economy as whole.

Capital flight out of South Africa will continue to pick up in the face of government missteps, unrest and falling commodities but a set of improved figures from China (who has the world flustered because of a potential slow down) and a delay in the increase of interest rates in developed economies like the UK & US might slow, if not reverse, this trend.

Drought

South Africa’s relatively sophisticated and diverse economy has shielded it somewhat from the worst effects of the long running drought that is well on its way to placing millions of people in neighbouring countries at risk of starvation.

This shielding effect is now fast coming to an end. White maize, a staple food of South Africa, will continue to rise (even if the rains came tomorrow) putting pressure directly on poor South Africans. Meat and dairy will also become drastically more expensive as herds are slaughtered and feed prices sky rocket.

The length of the drought has caused many farmers to go into debt to maintain operations. Even in good times profits in farming can be elusive. As the drought drags on many of these farmers face the real prospect of defaulting on their loans. Despite being only a small section of the economy, making up between 2 and 6% of GDP, any kind of mass default of farmers’ loans will likely have a pricing and risk aversion impact on the banks that lent the money. Taken alone these defaults would do little to shake the local credit industry but there is growing weakness and this agri-default will not help!

As farms become dormant or shut down entirely there will be agricultural job losses. These now unemployed and low skilled workers might be joined by subsistence farmers who have little access to water infrastructure and whose lifestyle will no longer be sustainable. This will speed up the demographic shift from a rural to an urban population.

Unfortunately our urban centres will remain incapable of offering employment to the vast numbers of job seekers in the short to medium term. There will be tension and there will be unrest. As the drought worsens our Southern African neighbours might find themselves incapable of assisting their own people resulting in further waves of migration into SA. I would not be surprised if amongst the ‘normal’ unrest we see significant xenophobic incidents as prices and competition increase.

Eskom

So far Eskom has avoided load-shedding in 2016. Clearly the energy provider has made some herculean efforts to upgrade and maintain its generating and supply networks. Even the drought, which has taken one hydroelectric plant offline, has not precipitated a crisis. Eskom and the government assure us that Load-shedding is a thing of the past.

While I’m cautiously optimistic about load-shedding I can’t help but feel that Eskom’s success is based on more than the company’s turnaround strategy. The potential exists, though it has been denied by Eskom in the past, that the shelving of load-shedding is due more to a decrease in demand than an improved supply.

This decrease in demand has been attributed to private sector efficiency drives, moves toward independent or alternative sources of power and from a scaling back in industrial and other business activity as the economy falters. This means that Eskom is selling less electricity.

This might not be all that bad for the grid, giving Eskom still more breathing room, but if the time is not used wisely we might see the return of load-shedding if/when growth picks up. And if demand for Eskom’s electricity continues to decline the parastatal will face a funding crisis as old debt repayments cannot be serviced by income. We are seeing this now with its controversial application for a 16.6% increase (instead of the 8% it will already receive this year) because of a shortfall in income.

Whatever the outcome of that application I believe that this year we’ll avoid the national load-shedding we saw in 2015. Just not for the reason we’d all like: the successful implementation of a sensible power plan.

Don’t get me started on our nuclear procurement program!

Cost of Living

As I’ve explained above the rising dollar price will cause an uptick in inflation (which will only get worse if oil prices rally and the Rand doesn’t). The drought will also push inflation higher as the cost of everything that grows/needs water in South Africa increases.

In response to this increase in inflation and as an attempt to bolster the Rand the South African Reserve Bank will increase interest rates at least once this year, probably later this week, making the price of credit just that little bit more expensive. There is a strong argument against raising the interest rates in the face of current circumstances but this seems to be a minority view, at least for now.

The interest rate increase and inflation will act as a harsh, dangerous one-two punch combination for a country with such a high proportion of consumer debt. Many people will finally collapse under the weight of their debts.

Politics and Unrest

The black middle class has grown massively but much of that growth relies on credit. Faced with higher interest rates and therefore more of their money being used to service debt many people who have clawed their way out of poverty will, in 2016, be faced with the real prospect of being dragged back down into it. And even those who live debt free will see their incomes swallowed up by rising prices and taxes.

As we saw in 2015 with #Feesmustfall and #Zumamustfall the middle classes are becoming increasingly active, finally adding their voices to those of the poor. Promises have been made and if they are not kept punishment from the electorate could be much harsher than previously. Also, as it is an election year and our democracy is so young and our politicians are so immature I expect opportunistic disruptions and outright confrontations along party and race lines to increase still further.

While the ANC is unlikely to lose the majority during our local elections (to be held sometime between May and August) I believe that there is a very real possibility it might lose important urban centres like Johannesburg and Port Elizabeth. Such a turn of events taken together with the drought, the unrest and the failing economy will, I believe, lead the ANC to re-evaluate its support of President Zuma’s policies and, perhaps, the man himself.

If, on the other hand, the party maintains the same level of electoral and provincial dominance then no factions within the ANC could be justified in ousting the President and we all need to get use to a Zuma Presidency and continued #Zumafinance until at least 2019.

Despite the stated independence of the SARB the election date might determine when the expected interest rate increases occur. If political interference is as bad as it appears to be currently, as we get closer to the election date (still up in the air) the less likely a rate increase becomes.

Conclusions: What will this mean for Home Loans?

Loans will become more expensive.

Banks will become increasingly obsessed with affordability.

But banks will also be more generous to clients in good standing as they compete for good quality business.

Conclusions: What will this mean for Property?

Demand in certain areas will remain high. Urban centres will see good rental returns throughout the year.

Investors willing to take risks could make significant returns in middle and low income areas as demand increases.

Prices in urban areas will continue to track higher, although at a slower rate, do not expect to make your fortune from flipping properties this year.

There will be increased numbers of distressed sales and auctions. There will be better deals, if not bargains, available but demand will remain high and these will be quickly snapped up.

The demand has fuelled some investment in developments and many of these will start coming onto the market in 2016 soaking up some of the demand for housing. But this is still not enough.

Advice

Competition for property will remain heavy. If you’re going to buy you will need to be prepared. Get pre-qualified and make sure your documents are in order to avoid disappointment.

Pay down or pay off your debts and start living more frugally.

When making your calculations and looking at purchasing property plan for interest rates above 10% (this includes rate concessions aka discounts).

If you’re buying for investment buy in secure complexes or apartment blocks near CBDs and other established business hubs.

If you’re lucky enough to be able to afford a holiday home the end of this year will be a great time to start shopping around as debt forces sales of extra properties.

Final Word: “Sometimes things have to get worse before they get better.”

Even if this gloomy post is only half right it will be a tough year for most people. There exists, however, the real possibility of the start of significant and positive change for South Africa. Either the electorate will finally start to punish poor governance or the economic realities will force change.

Through it all property will remain a sound investment if the purchase is well researched and you are confident in your ability to continue service debt.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s