The Property Market

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The Property Market Performance and Prospects
Presenter Christopher Hart Senior Treasury
Economist
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Outline

• Property as an investment
• Some History
• Property Bubble???
• Price Drivers
• Currency and Interest Rates
• Commodities
• Economic Growth
• Investment returns

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Merits of Property Investment

• Interest payable is deductible
• Offers significant tax planning possibilities
• Passive income
• Inflation protection
• Beware the hassle factor!
• Beware emotions
• Research and do the feasibility study

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History
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Average real price of houses Quarterly averages,
80m²-400m², lt R1,6 million
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Average nominal price of houses Quarterly
averages, 80m²-400m², lt R1,6 million
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House prices and the mortgage rateQuarterly
averages
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House price growth and inflationAnnual averages,
80m²-400m², lt R1,6 million
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Property Investment a long term commitment
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Property Investment a long term commitment
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The Residential Property MarketIs there a
bubble?
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Assets in developed economiesTotal trillion,
end-2002
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Residential property market risks

• As houses are normally paid for by borrowing
  (unlike equities), a housing bubble is
  potentially more dangerous than a stockmarket
  bubble, because it is associated with more debt
• IMF has found that output losses after a housing
  market crash have been twice as large as those
  after a stockmarket crash owing to the impact of
  falling house prices on consumption
• A decline in property prices can leave households
  with houses worth less than the amount they have
  borrowed
• Housing busts normally have a greater effect on
  banks, which are typically heavily exposed to
  real estate
• Falling house prices can lead to an increase in
  non-performing loans, and as banks collateral
  shrinks, so does their capacity to lend

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House pricesAverage annual real change,
1995-2002
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Real house prices
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Affordability of housingHouse prices to average
income
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Affordability of housingHouse prices to average
income
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House prices to remunerationQuarterly averages
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Affordability of housingSouth Africa House
prices to remuneration
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Average real growth in house prices80m²-400m², lt
R1,5 million
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Price of new existing houses Nominal
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Household debt of household income, 2002
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Mortgage debt of household disposable income
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Housing market bubble? International versus South
Africa

• Risk of deflation internationally declining
  inflation in SA
• Buy-to-let market is saturated globally similar
  signs in SA
• Globally, interest rates are currently at a low,
  while South African interest rates are on a
  declining trend
• Mortgage equity withdrawal for consumption
  purposes is rife in many countries, while it is
  less common in South Africa
• Real house prices are at record levels in many
  countries, but are still well below historical
  highs in South Africa
• Ratio of house prices to income still relatively
  low in South Africa, while it is at an all-time
  high in some other countries
• Household debt as percentage of household
  disposable income hit a five year low in South
  Africa at the end of 2002, while it is at a
  record high in many other countries
• The ratio of mortgage debt to household
  disposable income in South Africa is relatively
  low compared with other countries

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Price Drivers
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US Twin Deficits

• Current account deficit now the biggest in
  history both nominally and as a of GDP
• Budget deficit biggest in nominal terms (not as a
  of GDP) but getting there!
• No political will to recognise or resolve the
  problem this year
• Further deterioration in both deficits are
  possible before improvement
• Further USD weakness expected as a consequence
• Alternative investment destinations to US likely

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Inflation currency a major driver
Expected to weaken moderately. Current trend
uncertain and dependent on which factors dominate
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Commodities further boost expected
Gold and platinum to support the rand in 2004
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Commodity Prices

• Stronger global growth supportive of higher
  commodity prices
• Chinese demand accelerating
• Extraction rates lagging consumption rates
• Declining real commodity price levels led to low
  exploration or extraction replacement
• Weaker dollar also supporting higher USD
  commodity prices
• Further significant USD weakness supportive of
  gold and platinum

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International Interest Rates
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International Inflation Rates
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Theoretical money market rates based on inflation
and defict/GDP figures for 44 countries 1993 -
2002
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Implied prime lending rates based on money market
rates for 44 countries 1993-2002
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Stock Markets
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Summary of Prospects
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