How the residential property market is impacting middle-class families

The chatter around braais and dinner tables these days is being dominated by the vast destruction of middle-class wealth due to the steady collapse of the residential property market.

Typically, these conversations are sparked by one of the participants knowing (or being) a ‘forced’ seller of a property – mostly due to emigration or semigration. At this point, the owners often realise that a property purchased for, say, R3 million around a decade ago is barely worth that price today (plus it takes months and months and months to find a buyer). 

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To keep up with inflation, that R3 million house (bought in 2014) ought to be worth R4.9 million today. Aside from very specific markets (think much of Cape Town and surrounds), it is not. 

This is not unique to the upper-income segment of the market, although due to emigration patterns, it is certainly more apparent in the R2 million-plus price bracket. It is also the reality for R600 000 studio apartments and R1.5 million houses in ‘well-off’ areas across the country. 

Those who are unlucky enough to still own investment properties are sitting with exactly the same problem, compounded by the fact that they’re funding the shortfall between rental and the all-in monthly cost of the townhouse (bond repayments, levies, maintenance). 

House price growth over the years

There have been various charts doing the rounds on X (formerly Twitter) showing the, ahem, ‘underperformance’ of SA’s residential property market in real terms. Crucially, this factors in the impact of inflation to see the underlying – or relative – performance of prices over time. (With the impact of inflation over time, typical house price index charts are almost always up and to the right … but so are inflation ones.)

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Picking 2007/08 – the absolute peak of the market – as the start of this comparison is slightly disingenuous. Following the global financial crisis (and the recession), prices returned to more sober levels and remained broadly flat in real terms for about a decade. This meant that growth in house prices just about kept up with inflation. 

In the last three years, however, house price growth has been beneath that of inflation. Data from the Bank for International Settlements via the St Louis Fed’s FRED (Federal Reserve Economic Data) tool shows just how stark the decline has been. 

A stuttering economy, interest rates at multi-decade highs, load shedding, and emigration sales above their long-term average mean a struggling residential property market. 

Near-catastrophic impact

For many middle-class South Africans, the majority of their wealth is tied up in their physical property and retirement savings (typically a pension fund or retirement annuity). 

With primary residences, the theory has always been that nearer retirement, they’d be able to ‘bank’ the equity from their paid-off homes and downscale, with the difference (‘profit’) being used to supplement their existing retirement savings. 

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But if that R3 million house is no longer worth the R5 million it was expected to be, the disparity – especially for those close to retirement – could be near-catastrophic. (For those with longer time horizons until they reach their 60s, a change of strategy may be required.)

If balanced funds – the cornerstone of ‘conventional’ retirement saving – had performed, this would be fine. However, in the last decade they haven’t.

Both the Allan Gray Balanced Fund and the Coronation Balanced Plus Fund have outperformed inflation but underperformed the hurdle of CPI + 5% – a measure used by Coronation. The former has delivered returns of 8.3% (annualised) over the last 10 years, while the latter has managed 7.9%. Annualised CPI over this period has been 5.1%. So investors would’ve kept up with inflation but hardly outperformed. 

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Markets globally – especially in the US – have handily outperformed this. But with restrictions on the percentage of assets allowed offshore (these were recently relaxed to 45% but had been 35% for ages), any of those gains from offshore have been dragged lower by the underperformance of the JSE. 

Over the last decade, the S&P 500 has not only outperformed the JSE – it has delivered annualised returns of practically 13% – but the rand’s weakening over time has boosted those returns.

Exchange-traded funds (ETFs) that track that index have only been around since 2017, but these are returning growth of 20% per annum. Sygnia’s MSCI USA Index ETF (not a direct comparison with the S&P500) has returned an annualised 17.1% in rand terms over the last decade. Even its MSCI World Index ETF has delivered 14%. 

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The JSE Top 40? A paltry 7.4% annualised, meaning very little compounded capital growth. 

The impact of those “nine wasted years” (to quote President Cyril Ramaphosa) and the stuttering recapacitating of the state is far more serious than the headline and will likely be felt for a while yet. No wonder this keeps popping up in social conversations.

This article was republished from Moneyweb. Read the original here