Real Estate Investor Magazine South Africa April 2015 | Page 18

cover story

The market is flooded by properties
from desperate, indebted sellers
as well as bank-repossessed
properties, creating an oversupply
that depresses prices in a buyer’s
market. Once an over-supply has
occurred in the market, it can take
many years to balance out.

Characteristics of the Recovery
Phase (Upturn)
• Market stabilises as supply and
demand balances
• Prices become more reasonable
• Interest rates begin to drop
• Sales volumes and sales prices
achieved increases

The various economic factors
impacting the property cycle
stabilise and return to equilibrium.
Lower interest rates reduce the
financial pressure on consumers,
and disposable income and
income-debt ratios improve. It
becomes easier to get credit and
mortgage finance. Vacancy rates
slowly fall, rents start to rise, and
property values start to rise slowly
- usually less than 10% per annum.
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April 2015 SA Real Estate Investor

The oversupply of properties in
the market begins to dry up after
a period of dampened development
activity. Property prices become
more realistic and sales volumes,
as well as sales prices achieved,
increase.
How long and deep is a phase?
In South Africa, in general, the
property cycles usually stretch over
7 years, while the macro property
cycles tend to play out over 20

Characteristics of the Bust
Phase
• Oversupply of property creates a
buyer’s market
• Real prices drop
• High interest rates
• Credit difficult to obtain
• Construction slumps
• Rising yields

years. However, this does not mean
that each phase of the cycle is of
equal length or of equal impact.
While it is certain that a slump
will precede a recovery, which
will be followed by a boom and

an inevitable correction, what is
uncertain is the duration of any
one of the phases, and the highs or
lows that may be reached during an
upturn or a downturn.
The reason is simply that the
length and depth of each phase
of the cycle is determined by a
number of uncontrollable variables,
including the state of the global and
local economy, social and political
stability, consumer confidence,
investor sentiment, inflation rates,
interest rates and more. Major
events, such as a fluctuation in the
oil price, a catastrophe or hosting
a global sports event, can hasten
an upturn or extend a downturn.
As a case in point, in the current
cycle, our property market has
been languishing in a protracted
recovery period since late 2009,
with few signs of a boom in the
next year or so.
An unusual confluence of a
specific set of these uncontrollable
variables could also cause the
next top or bottom of a cycle to
be higher, lower, flatter, sharper,
or shallower. For example, during
the last property boom, house
price growth peaked at a dizzying
average annual rate of 32% in 2004.
Given the different circumstances
in today’s market, it is unlikely that
such a high will be reached again.
Nevertheless, the signs are clear
that the cycle is turning, as it
always does, and the local property
market is experiencing an upturn.
What remains uncertain is how
long the recovery will continue
to languish, when the next boom
will be experienced and what level
property price inflation will be
reached before the next market
correction.
Many cycles, many clocks
Investors cannot apply the national
property clock to a specific area,
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