Fin24

Political risks and property

2011-07-04 09:31

A Fin24 reader writes:

I am considering buying a home. I can afford it, but I’m not sure whether it is really a good investment given the unstable political environment in our SA.

Erwin Rode, property economist and valuer at Rode & Associates, replies:

History has shown us that bad political choices have the potential to affect all asset classes - eventually.

However, before we get too despondent, may I remind the reader that some of us, or some of our parents, were concerned about the unstable political environment in 1948, 1961, 1976, 1986, 1994, and now in 2011.
 
Shares, the most volatile of asset classes, would dive more immediately than immovable property. But, make no mistake, in the end, property’s value is held up by continued demand, which in turn is partially determined by affordability.

Even “risk-free” government bonds would be affected by a political fallout, because political instability invariably brings in its wake unpleasant inflation, with interest rates that shoot through the roof, thereby depressing the market values of bonds.
 
Shares, bonds or property are the classic inflation hedges, provided inflation remains moderate; but once it goes into the stratosphere, thereby destroying the economy, even these asset classes will be of little help.
 
The alternative is to buy cut diamonds, tell no one and sew them into your pants (near the zip somewhere) or bra. In short, if you are contemplating Armageddon, don’t think of property. Think of something transportable.

Comments
  • alain.regnard - 2011-07-04 10:39

    LOL - at Armageddon

      kobus.devilliers1 - 2011-07-06 17:02

      A no brainer LOL

  • StopRapingSA - 2011-07-05 00:24

    The proprty owners in Zimbabwe did better than any other investment group. Why? Property is inflation proof. As inflation goes up, they simply raised the rents accordingly. Basically people still needed to live somewhere. Even basic commodity traders did worse as supplies dried up.

      dave_23 - 2011-07-05 12:15

      Uhrm, except for those who were simply kicked off their land, of course.

  • Garth - 2011-07-05 07:38

    From your question, we deduce it is a primary residence you speak of. Well, simply put, you are either going to pay rental or pay a bond. Hopefully you are not contemplating paying cash. Property ownership comes with a variety of risks and expenses and if well managed, will more likely be better than rental in the long term. Property acquisition should be looked at from an investment perspective, hence you want to maximise your ROE and to do this, one obtains the maximum use of bank's money. So if you have cash of R1m and want to buy a home of R 1m, put down a R200k deposit, borrow R800k and invest the rest of the capital in assets that will pay the bond. If you anticipate a most unlikely "Zimbabwe" for South Africa, invest the capital offshore. Should your prediction come true, hand the property back to the bank and leave. We must warn you, however...you will be bitterly disappointed if you invest on the premise of chaos reigning down on this country...not only is it not likely to materialise, it can happen anywhere, e.g. homes in Michigan, US that were trading at around $200k in 2007 can now be picked up for under $40k...not because of political chaos, but chaos nonetheless. So do research and invest wisely. Good luck.

      Jonathan - 2011-07-05 12:25

      a good take on this - thanks for the objective view.

  • dave_23 - 2011-07-05 08:04

    My folks bought an awesome stand at a great price in the early 90's. But ja, nobody can predict the future. If you're a worry-wart, put your money in something more stable, like, emigrate. One problem with property as compared to e.g. shares is it can be much harder to liquidate rapidly when you see trouble approaching (e.g. if it looks like Malema is going to be president), because it takes easily six months from putting a house on the market to getting it sold, and if the economy is headed downward because Malema's busy campaigning for president, nobody is going to buy it. Shares you at least have some hope of selling before the stampede kicks in and the value dives too much. OTOH, shares might not be the best thing given the global economy is approaching the beginning of its next bust cycle. Bottom line is nobody knows where the hell to put there money these days. Good luck.

  • letswai - 2011-07-05 09:35

    goog advice. thanks

  • Nic - 2011-07-05 11:12

    Fortunes are built on property, population growth is predicted to go from 6.5 billon souls to 9 billon very quickly. Land is no longer being manufactured, can be geared and developed. Arable land and well located sites are always a good investment.

  • Vela Stardust - 2011-07-06 09:15

    Lol at diamonds in the zip area. Brings a new meaning to family jewels. Invest in a yacht. When the whatzit hits the fan just sail off over the horizon.

  • pmolesworth - 2011-11-04 14:25

    To leave liquidity out of your discussion just negates any sense in your article...

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