Property: buy, sell or hold?

This week we’ll take a look at the property market and what it can tell us about the broader economy.

Certain measures of the property market are leading indicators because they signal the future direction of economic activity. The issuance of building permits and new home sales, for example, telegraph future construction. An uptick in home sales can also signal additional consumer spending, particularly on white goods and home furnishings.

Taken as a whole, however, because the real estate market is influenced by so many other economic variables, real estate is generally a lagging indicator. Dieter Deppisch, Head of Property Data Solutions at the Knowledge Factory explains, “As the economy starts to suffer and disposable income declines, debt levels rise, unemployment increases and decreased risk appetite on the part of financial institutions means fewer people qualify to purchase residential property.”

Whether you’re looking for a window to the future or confirmation of the past, property data can be useful. Unfortunately, data can be hard to come by in South Africa – unless you’re willing to pay for it. For those of us dependent on free data sources, the South African Property Transfer Guide’s Property Clock powered by Knowledge Factory, which combines a host of data on property markets into one easily readable format, is quite useful.

How does this indicator work?

SAPTG’s Property Clock is a graphical representation of conditions in South Africa’s property market. “[This is] a generalised indicator for the layman,” says Deppisch, “to give an indication as to whether we are moving into a sellers’ market and at what speed.”

To create the clock, the team at the Knowledge Factory conducts a “quantitative assessment of market data, CPI (consumer price index), PPI (producer price index), interest rate movements and construction data (which is very important), what is happening with mortgage credit extensions, Kagiso’s employment index and other indices,” explains Deppisch. All of this information feeds into a “qualitative assessment” of the overall market, essentially a well-informed summary of a lot of different data sets.

This summary is presented in the form of a clock with four main reference points: 12 o’clock, indicating a sellers’ market; 3 o’clock, showing a downswing; 6 o’clock, indicating a buyers’ market; and 9 o’clock, signalling a recovery.

The 12 o’clock “sellers’ market” is characterised by a healthy overall economic growth rate, low unemployment, and low interest rates. Buyers have easy access to mortgage bonds. Business confidence, disposable income, and demand for property are all high. There is a shortage of properties for sale and those that are on sale stay on the market for only a short time. Sellers regularly achieve their asking price and overall prices, due to high demand and low supply, are increasing. Construction levels rise to meet demand and many new developments come onto the market.

When the hand points to 3 o’clock, the market is “Mid-Market UP”. The economy is slowing. Interest rates are increasing and credit conditions are tightening. Properties begin to sit on the market longer and lower demand drags average prices downwards. Construction of new houses begins to slow as demand wanes.

At 6 o’clock the “buyers’ market” hits, which is characterised by slow economic growth, higher unemployment, lower disposable incomes and higher household debt levels. As inflation begins to rise, interest rates increase and credit is tight. Business confidence is low, as is demand for property. Properties remain on the market for a long time and new construction activity dries up. Stock levels and distressed sales rise and banks auction off repossessions. Sellers in this marker seldom achieve their asking prices, but cash heavy buyers may find bargains.

Finally, when the clock is at 9, the market is in a “Mid-Market DOWN” position. In this market, the economy is improving, inflation is ebbing and interest rates are decreasing. As a result, credit becomes more readily available. Demand improves, properties sit on the market for less time and house prices increase. Construction begins rebounding.

How do I use this indicator?

“There are three things that matter in property: location, location, location,” the old adage says. That’s certainly true, but many would argue that a fourth consideration is equally important: timing. Buying a house in boom times or selling in a downturn can cost you thousands of rands.

Let’s look at an example. Assuming a prime lending rate of 9%, paying just an extra R25 000 for your R775 000 house can add another R225 to your monthly payment. Still not convinced? Those extra monthly payments will add up to almost R54 000 over the 20-year life of your bond!

Getting your timing wrong can be a costly mistake, but how do you know when the timing to buy or sell is right? Real estate markets, like all markets, are tough to read. History teaches us that prices go up, and prices come down. Booms turn to busts. Conditions turn around, overheat, and fall again. Knowing where we are in the cycle, as the previous example shows, can have big consequences. That is where the Property Clock comes in.

By condensing various data streams into one easily readable format, the Property Clock gives you, as a potential buyer or seller, a macro view of market conditions. Look for where the clock’s hand is pointing, where it’s moved from in the previous month and why.

Here’s one important caveat. The Property Clock is a useful tool, but it’s not a crystal ball. This is a national indicator, not a local one. Just because the nation as a whole is experiencing a buyers’ market doesn’t mean that the suburb you’re interested in is too. Waterfront property might be hot while leafy suburbs are cool (location, location, location, remember?). So do your homework. Don’t put too much faith in one measure.

When and where do I find this indicator?

The Property Clock is updated monthly and available on the SAPTG website (www.saptg.co.za). Make sure to check out the write-up accompanying the clock for an explanation of how and why the clock’s hand moved. While you’re on the site, check out the other market indicators for added insight.