Food now key player in housing market

Jan 11 2016 18:30
Carin Smith

Cape Town - Food might very well replace oil as the key commodity strongly linked to the fortunes of the local residential property market, John Loos, household and property sector strategist at FNB Home Loans, said on Monday.

He said in 2015 oil was the key commodity linked to SA's property market. In his view the property market was far better off with low oil prices in 2015 than it would have been with high oil prices - all else being equal.

The rand appears to be a key influence due to domestic food prices being strongly influenced by global food price levels. Secondly, there is the impact of the ravaging drought.

"Starting 2016, it seems that the commodity on everyone’s lips is that of food prices and food production levels, and the news is not that good," warned Loos.

"We can’t underestimate the potential risks of the drought to the broader national economy and residential market via the risk that it poses to food prices, inflation - and therefore interest rates - along with the contribution to slower overall economic growth," said Loos.

READ: Housing market points to looming recession - expert

He added that the key risk to residential property, from a declining agriculture output point of view, lies in the rural towns whose economies are very strongly dominated by agriculture production.

"While not pretending to be an agriculture expert, the impact of the drought is reported to be severe. What we do know is that the Producer Price Index (PPI) for agriculture had reached double-digits to the tune of 10.75% year-on-year by November 2015, having surged rapidly through last year from a deflation rate of -3% as at January 2015," said Loos.

He explained that this should be expected to exert upward pressure on the Consumer Price Index (CPI) inflation rate for food with a lag, which at November was still at a more moderate 4.8% rate.

Given food’s significant weighting of 15.41% in the overall CPI, its influence on the overall CPI inflation rate can be very significant.

One can, therefore, expect a negative impact on real household disposable income growth due to potentially higher overall CPI inflation, as well as on the cost of credit and interest rates is an important factor for the residential property market, which is highly credit driven.

An added factor Loos raised, is a risk posed by higher food inflation as an impact on the current social tensions in the country.

Food price surges can be devastating for the poor and can potentially fuel social tensions further, potentially disrupting output of the broader economy, according to Loos. This can in turn influence household disposable income growth and, therefore, the purchasing power for homes.

According to Rawson Property Group managing director Tony Clarke, the weakening rand could bring a "thin silver lining" for SA's leisure property market though.

READ: SA at risk of underestimating property value decline

“The low value of the rand against major currencies like the dollar, pound and euro discourages South Africans from travelling abroad, and encourages them to ‘rediscover’ all their favourite local holiday destinations,” said Clarke, “and that has certainly been evident this festive season."

“The beaches were well frequented this December all around our coastline, from Lambert’s Bay on the Cape West Coast right around to Zinkwazi on the KwaZulu-Natal North Coast, and hotels, guesthouses, restaurants and other tourism-related businesses all felt the benefits as thousands of upcountry visitors enjoyed holiday hotspots like Camps Bay, Hermanus, Mossel Bay, Knysna, Plettenberg Bay, Margate, Scottburgh and Umhlanga, as well as many less well-known towns and villages."

The Rawson franchisees who manage holiday homes to let also report that most were fully-booked for the school holidays, which is good news for the investors who own them.

The group’s offices in the coastal regions have experienced much higher levels of interest in both family holiday homes and leisure property investments this summer season than in the previous two summer holiday seasons.

“We have seen this before, when there is increased interest in property investment, but prospective buyers don’t feel they can afford to invest overseas, or are uncertain about doing so. They will decide to buy locally instead, starting with a property in a favourite leisure location that they plan to use for their own holidays, let the rest of the time and eventually retire to,” said Clarke.

ALSO READ: Climbing interest rate strains property market

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fnb  |  sa economy  |  drought  |  food  |  property



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