THE EBB AND FLOW OF A TECHNICAL RECESSION

PUBLISHED 17 OCT 2018   

What is a technical recession?

In early September, StatsSA announced that South Africa has reached what is considered a technical recession. This is defined as two consecutive quarters of negative economic growth, the likes of which have not been seen since the 2008/2009 global financial crisis. The indicators of the decline were clear when the Real Gross Domestic Product (RGDP) contracted by 0.7% in the second quarter of this year, following a recently revised 2.6% contraction in the first quarter.

What are the possible effects?

Negative economic growth causes a knock-on effect filtering into all sectors of consumer behaviour. With a tightening in everyday spending there is a gradual tipping of the scales of supply and demand. The imbalance in consumer conduct causes inflation.  To compensate, interest rates may rise, and businesses may be forced to cut costs by retrenching employees, downsizing and restructuring.

What caused the technical recession?

It is difficult to pinpoint the direct cause of a recession. It makes more sense to consider the confluence of multiple factors that usually cause these ‘depression’ like phenomena in general, and then consider the specific characteristics unique to South Africa.  Professor of Economic and Business Sciences at WITS, Jannie Rossouw, said on a recent review that demand is and has been subdued. Since 2017 small and medium business owners have reported that demand is down. Demand could be depressed due to the slow rise in prices for goods and services, as the rate of inflation rises, those same goods and services can no longer be purchased for the same amount as before. A purely South African factor is the post-Mandela political scandals that have played out in the media and directly created a strenuous relationship with international investors and diminishing confidence in potential investment. Service delivery mismanagement; 27% unemployment rate and government corruption have been widely publicized overseas and not surprisingly investing in an unstable environment such as this is unappealing.

What does this mean for the real estate market?

The phrase ‘buyer’s market’ has been popping up in recent months. This mirrors the process of inflation whereby the supply of houses is greater than the demand from buyers. The reason it’s considered a ‘buyer’s market’ is because the surplus of houses gives the buyer more choice. Due to the decrease in demand, sellers are often forced to lower their prices to attract buyers. Therefore, buyers have a chance to purchase property for lower prices. If economic recession continues for an extended period, stunted spending due to higher costs could spill over into households. Homeowners, unable to pay bonds may be forced to sell their properties or banks may repossess them.

A cautiously optimistic outlook

Although recent reports of the technical recession have caused some concern, an optimistic outlook might be worth considering. Overberg Asset Management analysts advised News24 that “although clearly disappointing it is a very shallow recession and not one that is likely to persist into the third quarter.”

Sandy Walsh, MD at Property.CoZa South Africa, gives this advice:

  • Speak to a knowledgeable property professional about property prices in your area.
  • Do thorough online research to truly understand the current prices and check multiple sources.
  • If you’re selling your property, be prepared to adapt your prices to the changing market conditions. Your property professional should be equipped to counsel you on this. Request a written property valuation (also referred to as a Comparative Market Analysis) with supporting statistics of actual properties which were sold in your area, as well as what is currently available ‘For Sale’ in your area. Remember that sellers also do their homework and comparisons…
  • Feel free to request a marketing plan from your local area property professional. Be weary of potential buyers who have not been screened by your property professional. Knowledgeable property professionals specializes in their trade, and in most instances they already have a qualified buyer’s database on hand. They spend their time and money to be good in what they are passionate about – ‘selling your property at the highest price, in the shortest time frame with as little hassles as possible’.