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What Can We Expect in 2006
By Scott Picken, MD of IPS
15 January 2006
When I arrived in the UK in 1999, the housing market was booming. It grew strongly till 2002 and then it levelled out as everyone seemed to head and see what was going to happen. There was talk of interest rates hikes, the fact the market was at a peak and the threat of another invasion. After a year where the market saw minimal growth, confidence came back into the market and we continued to see strong growth in 2003 and 2004. 2005 has been a similar stabilisation period and now there is talk of further growth, although more sustained. I bought my first house in 2002 and managed to get it below market value as the market was weak and now we have sustained 3 years of good growth and a great cash flow.
What have learnt from this example? I think three things:
- The market conditions will also look variable – therefore you need to do the financial analysis to minimise the risk.
- The prevailing economic principles will withstand hype. In the UK there is a strong economy and a major problem of supply and demand. When you understand this there are great investments to be found as the market takes a breather!
- One must focus on the medium to long term, and most importantly on the cash flow and not only the capital appreciation.
I believe that South Africa is no different. It has seen four years of terrific growth and now the market is stabilising and taking stock. I believe this is a great sign and it adds to my confidence in the sustainability of the market. The basic principles of South Africa property market are this:
- The Economy is in one of the strongest positions in 50 years. Statistically the South Africa Economy has always grown significantly when the gold price has been strong and it is one of the highest prices in the last 20 years. This, and the strong demand for commodities, has affected the Rand value and meant that inflation has been kept in check. The economy had 5.1% GDP growth in 2005, which makes it one of the better performing economies in the world. The government is aiming for 6% growth. We have had 30 consecutive quarters of growth with all sectors being effected.
- The Black Middle Class – with the growth in the economy it is creating 300 000 new middle class people every year. Over 2 million people have joined the middle class ranks in the last 10 years.
- Interest rates – with inflation under control and the strong rand, there is little chance of interest rates going up and even more and more commentary about it coming down to a prime of between 8% and 10%, if the oil price remains stable. This will have a major effect on most South African’s, significantly the middle class and then affordability of property.
- Confidence – confidence in the country is at an all time high (60% of the population). We are currently the 8th most optimistic country in the world. Investment confidence is rising quickly with some of the huge investments like Barclays or the Vodaphone deals, but also the fact that the JSE is booming with a huge increase in foreign investment.
- World Cup in 2010 – the rest of the world does not even know we are hosting this event yet and we can only start promoting it after germany in July this year. Danny Jordan said, “It is like we are gagged, I never thought we would have freedom of speech problems again.” The German world cup’s sponsorship is worth $2.1 billion and South Africa has already secured $4.8 billion, but I believe that the most important thing is that as the world focuses on South Africa, it will realise the opportunities and the perceptions will start to change!
Based on these critical understandings, I believe that with the right research, 2006 will provide investors with a great opportunity to find good investments. However the days of flipping are over and we are looking to more normalised (average has been 12% over the last 30 years) and sustainable growth. I truly believe the market is taking stock and once people realise that it is stable and that its growth has been based on true economic principles we will continue to see stronger growth in the latter half of this decade.
If the market does slow, it is the flippers and the speculators who are going to be caught with their pants down and there should be some good bargains on the market for real investors.
This is what Robert Kiyosaki (Rich Dad, Poor Dad) has to say: “As many of you know, I personally do not like to flip properties, although I have made a lot of money doing it. The reason I do not like flipping properties is because to me, that is speculation not investing. It is investing for capital gains, rather than cash flow.
This is what Warren Buffet says about investing because prices are going up. He says:
"The dumbest reason in the world to buy a stock is because it’s going up."
I would say that is true for real estate. Do you know how many people buy real estate on the assumption that the property will go up in value? Do you know how easy it is to buy a property with the hopes that it’s price will increase? Do you know how hard it is to find a property that is undervalued or cash flows without it going up in value? Yet that is what so many people do. They buy on hope or a future promise rather than dig a little harder and look for a great investment that is high in value and low in price … today not tomorrow. While they have made a lot of money in the last few years, I suspect that it will be tougher and riskier to be a flipper in 2006.”
As with my UK property from 2002 – it is all about cash flow and capital appreciation is a bonus. I believe 2006 could be one of the best years in the last 4 years to pick up good investment properties, but you need to understand properties fundamentals, the economic prospects, manage the risks and basically invest for the medium to long term.
Here is to a year of us all increasing our financial intelligence and taking advantage of the many prospects available. I am currently in South Africa and the country is brimming with confidence at the moment and I believe there are plenty of opportunities here.
May it be a year beyond all our expectations!
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