Property and stock market correlation

An interesting piece was run on Realestateweb yesterday with two rather big name property players giving contrasting views on whether the stock market collapse would have a negative impact on housing prices in South Africa.

Saul Geffen, the CEO of ooba, the country's biggest mortgage originator, apparently described the property market as compelling and argued that investors that were tired of the uncertainty of the stock market would instead move back into property because it was something tangible because they could touch and feel it.

Samuel Seeff, chairman of the Seeff Properties on the other hand argues that the uncertainty and economic downturn would probably further depress prices and keep investors out of the market.

Now obviously Geffen has to ‘talk his book’ to some extent so I guess we have to try and look at the real factors to find out whose right.

First and foremost, I suspect that many ‘paper millionaires’ have seen much of their wealth get obliterated with the stock market tumble. That obviously affects their credit records.

I don’t think it is rocket science to work out that if you previously had R1m in assets listed on the stock market and those are now worth R700k, you credit score will have decreased. This obviously makes you more of a credit risk than it did than before and the credit you qualify for will be lower.

If one just looks at the general economic consensus going forward, one would think that it gives you some idea of how property is likely to perform…

Yes interest rates may drop next year but lets remember that overall GDO growth is expected to halve for the next two years. That would mean a lot more delinquencies and businesses closing up shop – just in general a lot less extra cash in the consumers hands.

I just don’t buy anybody arguing that property demand and prices is likely to increase in the middle of an economic slowdown that will halve growth prospects.

In terms of prudent capital management, I also don’t expect Absa to be the only bank to put the brakes on clients drawing against their access bonds. There is going to be a hell of a lot less free cash available to draw on.

My final comment on this is as follows:

If you have R10 000 cash and you want exposure to the property market, you are probably faced with 2 options:

A) Put the R10k down as a deposit and apply for a loan which you might or might not get. Lets be blunt – if you are paying a R10k deposit on an investment property, you are probably going to be cash negative on the transaction

B) You put R10k into a quality listed property fund (such as Apexhi or Growthpoint) where you might find your unit price being buffeted a bit depending on the mood of the stock market but you are pretty much guaranteed an 8 – 10% cash positive return

Sorry I don’t buy it – the performance of the stock market would lead the performance of the property market from where I stand….