10 Nov 2010
The South African property press was quick to pick up on reports that house prices in the United Kingdom, many parts of Europe and the USA have still not recovered. Certain economists are, in fact, predicting no price rises here for at least a year and in some areas further price falls into 2011.
This scenario has led some commentators to assume that a dismal future lies ahead for South African residential property. However these commentators are operating with tunnel vision: what almost all of them completely overlook is that in the rest of the world houses price rises have this year risen markedly and are expected to continue to do so in 2011, albeit at a slower pace. Quoting from the Global Residential Property Market Forecast for 2011 issued by Anne Porter Properties' United Kingdom associates, Knight Frank (thought by many to be the most astute and best informed property research team in the world today), On average 2007 and 2008 house prices fell across the globe by some 17%. Although this crash hit us later we saw similar falls in South Africa. Many commentators worldwide expected global house prices to languish at these low levels for some time to come. Instead, in most of the world by mid-2009 they bounced back in a remarkable fashion - a fact not appreciated by those who see only the European, UK and USA figures. Globally since early 2009 house prices have recovered on average by just over 10%. By mid-2010 values worldwide were only some 9% below their 2006/2008 peaks. It has to be accepted that as the rises of the previous decade had been anything from 100% to 300%, an overall decline of 9% is almost negligible and certainly not a reason for pessimism. The hardest hit by the crash was the USA (at one point done 31%) and several European countries, particularly Latvia, Greece, Spain, Ireland and certain smaller countries which are now having difficulty in meeting the European Union's debt repayment criteria. There were some spectacular falls in house prices over the crash period. Lithuanian house prices went down 63%, those in Bulgaria 34% and in Ireland the drop was 31%, ie, equal to that of the USA. However it has to be accepted that by mid-2009 on the global scene these were the exceptions not the norm. The Knight Frank report shows that last year the Asia-Pacific regions saw an 18% increase in their house prices, while African house prices in general rose 14%. In South America the rise was 7% and in the Middle East 6%. These figures surely are impressive. Sixty one percent of the countries from which data was obtainable have reported positive house price growth in the June 2009 to June 2010 period. What is more, Knight Frank data from the second quarter of 2010 suggests that the increase will continue despite strenuous efforts in many areas, particularly in the Asian countries, to control and limit price growth - which are likely to be effective in 2011. Thus far, however, only in China have these efforts had real success and here the intervention was generally regarded as essential because they were heading for a boom and bust scenario. The very positive Knight Frank data does not obscure the reality that although the global property world is looking healthy growth will drop back in 2011. The factors limiting rises worldwide, she said, are that in some areas, particularly Asia, property is now seen as overvalued and due for correction, while in much of the rest of the world ongoing debt problems and unemployment could result in loan cut-offs both nationally and for individuals, which are bound to affect the housing market. In Russia, she added, there is also a risk that the unusually high interest rates (11% to 17%) will also obviously limit housing price growth. Set against these limiting factors is a very encouraging trend revealed by the Knight Frank survey, ie, that cross-border trading is having a markedly beneficial effect on house prices in certain areas, most notably the sun belt of Europe, London and the southern states of the USA, particularly Florida. In the 12 months to June 2010, just over 50% of all new apartment developments in central London were bought by foreign nationals. Many of the Asian and Latin American countries have also benefited from increased foreign buying. What, therefore, is Knight Frank predicting for the year ahead? Overall their prediction remains bullish about global house prices holding their values subject to limitations, but KF do warn that tough conditions will continue to prevail in the UK and the USA. In the UK tax hikes and austerity measures, particularly cuts in state spending, could be followed next year by high interest rates, the combined effect of which will definitely limit house price growth for another year. In the USA a second wave of bond defaults and loan recovery difficulties is likely to usher in a further period in which price growth will remain static or even drop for the next 12 to 18 months. Here, however, it has to be accepted, as in certain of the Asian countries, that the previous prices had become unsustainable, were unrealistically high and that adjustment was necessary. Knight Frank reveal clearly that the problems in the USA and the UK were not simply due to over-lending. House prices had reached a stage were an adjustment was necessary. By contrast, house price growth in South America is likely to exceed 15% in 2011, while in Africa as a whole it is predicted to be just over 10%, with South Africa coming in well below the average at 3% after a significant 8% pickup this year. The overall picture that emerges from the Knight Frank report is that whether a country has been successful in increasing house prices or whether it is one of those lagging well behind in this respect, the limiting factor throughout 2011 is likely to be state restrictions on lending in an effort to keep debt levels down. The Knight Frank survey predicts that in Asia and most of the emerging markets which do not have excessive debt the lending restrictions will be less serious, but in the USA and in Europe the lack of mortgage finance will set limits on a recovery in the property sector. We in South Africa, so desperately frustrated by the National Credit Act restrictions, are, therefore, in the same boat as the rest of the world. However we have an economy that is still capable of growing at 3% plus per annum. We can, therefore, hope and lobby to ensure that growth is not held back by bureaucratic over-regulation and low productivity coupled to high wage increases and state policies which favour the privileged sections of the workforce, particularly those represented by the trade unions at the expense of the many hungry, unemployed people desperately looking for any form of employment. *Lanice Steward is managing director of Anne Porter Knight Frank, the Claremont headquartered Cape Peninsula estate agency