Last night (23 June 2016) Britain shocked the world by voting to leave the European Union. Many nations, including South Africa, are now asking how this decision will impact their economies and markets going forward. With the UK a trading partner to a great number of nations, there is likely to be some effect, even if it is only marginal.
“In my opinion,” says Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, “it will be interesting to see how Brexit impacts the South African economy and more particularly the housing market. At the moment everything is merely speculation as we are entering unchartered territory with no nation state ever leaving the EU. Since last night there has already been an impact on foreign currency, which has been behaving extremely erratically.”
So how does this impact South Africa? Goslett says that due to the fact that South Africa is highly reliant on importation of goods, the effect on foreign currency could bring about further inflation pressure as the rand weakenings. “In short, with a depreciating currency, importation will cost more and inflation will increase in South Africa, creating a repetitive cycle. We will essentially be importing inflation,” says Goslett. “A sustained weakened rand will also place further pressure on the Reserve Bank in increase interest rates. There is no doubt that interest rates will continue to climb, which will also reduce potential homebuyer’s affordability ratios. Homebuyers will have to factor in the rising interest rates and ensure they have some financial cushioning.”
Goslett adds that the property market could see many first-time buyers holding back and adopting a wait-and-see approach until the full effects of Brexit on the South African economy are revealed. This is usually the case during perceived instability in the market. “Another that we could see is a rise in the cost of credit. Usually during periods of global economic uncertainty, banks become risk averse, tightening their lending criteria. As a result, access to finance becomes increasing more difficult, as more stringent global lending criteria are placed on the banks themselves. Not only will it be harder to get credit from a bank, it will more than likely be more expensive, which will impact on consumer’s affordability levels,” says Goslett.
Head of Home Loans at Standard Bank, Steven Barker, says that while it is too early to confidently predict the impact of the Brexit outcome, it has added further uncertainty to the South African property market. “The consumer is expected to continue to face pressure on household finances in a rising interest rate cycle. Negative moves in the currency market could lead to higher inflation which could put interest rates under further pressure,” he says. “We will have to wait to see how this unfolds, but consumer confidence remains low and the property market is starting to see a slow-down in activity. Lending activities by the mortgage providers is reflective of the interest rate cycle and the deteriorating economic outlook.”
Goslett believes that Brexit will have no impact on property prices; however the market is currently in atransition period with momentum shifting towards the buyer. “This is more a result of domestic conditions, than any external foreign factors. The shift will cause property prices to stagnant for the time being. However, that said, opportunities often reveal themselves in times of change. Those who can identify the changing dynamic early on will be able to reap the benefits and take advantage of what the market has to offer,” Goslett concludes.