House prices are rising worldwide while South Africa …

More than a decade ago, rising real estate prices – especially in the US – were one of the triggers of the global financial crisis when heavily indebted homeowners defaulted on their mortgage payments and burdened financial institutions with a mountain of bad debts. In many cases it was a problem they had caused themselves. And it has turned real estate prices on the opposite.

The recent rise in real estate prices was not the trigger for a financial or economic crisis, but the result of one: the Covid-19 pandemic and the disruptions it caused.

The International Monetary Fund (IMF) recently put this into perspective with its Global House Price Index.

“While most economic indicators have deteriorated over the past year, house prices have largely discounted the effects of the pandemic. Of [more than] 60 countries included in the IMF’s Global House Price Index saw three-quarters increases in house prices in 2020, and that trend has largely continued in countries with more recent data, “the IMF said. (See grafic.)

There are a number of reasons for this condition.

Employees who are lucky enough to keep their jobs have moved to a bigger home because it is their place of work too. Rural estates have also become popular – you can work remotely and have space to move around in the event of a lockdown and perhaps grow your own groceries in the event of shortages. And the low interest rates around the world clearly helped. The result is that the fundamentals of supply and demand on the property front have turned positive.

This has a number of consequences, notes the IMF. Housing can become unaffordable for parts of the population. This reflects income inequality and can increase inequalities in wealth inequality – a particular focus of inequality activists. House prices are also a driver of inflation, and this has become a global conceptr lately.

Fluctuations in inflation, in turn, cause central banks to raise interest rates faster than expected – “monetary normalization” is the art of the world – which would add to the cost of those who bought homes with cheap credit. This scenario seems unlikely to trigger a new subprime crisis for a number of reasons – including banks requiring 10% down payments on a home loan, for example.

“More than a decade ago, a turnaround in property prices marked the beginning of the global financial crisis. However, the double boom in household credit and house prices in many countries before this crisis – and many previous property crashes – seem less common today, ”the Monetary Fund said.

For South Africa, soaring house prices have cooled off a bit, and frankly, IMF data seems to underestimate house inflation here in 2020. The IMF chart seems to suggest it was closer to 2%, but the FNB’s house price index shows that as of December 2020, South Africa’s December 2020 figure was 4.1%. Since then, it has peaked at 5.1% in April and weakened to 3.0% in September.

SA’s consumer price index rose to 5.0% in September from 4.9% in August, mainly driven by food and fuel prices. So house prices aren’t really driving South African inflation right now. Of course, rising interest rates in South Africa – and gradual hikes by the South African Reserve Bank – could spoil the party for some indebted homebuyers. But hopefully a big babalas from this party can be avoided. DM

This story first appeared in our weekly newspaper, Daily Maverick 168, which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest specialist dealer, please click here.

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