Property investors looking to take advantage of the weak market do not need to rush to secure properties.
FNB economist John Loos says it will be a long road out of this recession, and even after lockdown has passed, it is expected that normal recessionary conditions will cause the market to remain weak. In fact, the “rock bottom” of the real price cycle – which is theoretically the best time to buy property – may still be a few years away.
Predictions are that house-price growth will decline into negative territory this year, possibly as low as -14.5%, although this is the worst case scenario set out by Lightstone. Its middle-of-the-road prediction, which is based on a GDP drop of 6%, is that house prices will decline by 8.8%. FNB forecasts a -6.15% decline.
“People often assume that the best time to buy is when the property market is booming as that is when they see house prices rising but that is not necessarily the time to buy. That is often a seller’s market. As an investor you are more likely to want to buy when the prices are at their lowest,” Loos says.
So, the belief that it is always a good time to buy property is not true. Nor is the belief that property is always a good long-term investment. For property to be a good investment, he says, it takes a combination of buying at the right time, ensuring “good” yields, and having the necessary skill sets to manage that property correctly.
“Buy-to-let investors will want to put a tenant in their property but they need to manage that tenant and their property in a way that ensures they see good yields. If this is not done well then property can actually be a bad investment.”
It is important that investors look for good rental yields in comparison to the price that they are paying for the home. Loos says yields often rise in weak periods – and he expects such a rise over the next few years, making buying in many instances more attractive. But managing tenants during these times is also more challenging than in good economic times as they are under financial pressure.
“So it is never plain sailing.” Those looking to take advantage of the buyer’s market though still have plenty of time. “The past few years have seen very low house-price growth as prices correct downwards in real terms – meaning that price growth has been lower than general inflation. And I believe that this will carry on for a good few years in a stagnant economic environment.
“Following lockdown, the economy is expected to still be weak. Prices in real terms should continue to be under pressure and there are always sellers looking to sell quickly due to relocation needs or other reasons. This puts the buyer in a good position to drive a hard bargain.”
In essence, buyers are likely to be in a strong position for the foreseeable future, Loos says. Like all investments, property is cyclical and the current economy is affecting nearly all investment classes, says Nick Gaertner, director and chief operations officer at Knight Frank.
Still, the population is continuing to grow exponentially while land availability is fixed. People will always need a place to live and so the market will recover.
Furthermore, he says the financial pressure individuals are suffering as a result of Covid-19 are also providing “very good” buying opportunities.
“Desperate and panicked selling provides cash buyers with opportunities to buy property below market value.” For this reason, Gaertner says the knock of the short-term price drop caused by Covid-19 will not be felt. Apart from long-term capital growth, property also benefits from being able to achieve rental return and capital appreciation at the same time.
“Even if capital growth is slowed in the short term, it will continue to be strong in the long term and investors will immediately be able to benefit from rental return. “With interest rates at the lowest on record, it is far more achievable to cover bond shortfalls on buy-to-let properties,” he says.
Gaertner adds that the recent interest rate cuts mean that investors who attain fixed-rate mortgages should be in a strong long-term position.