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Property Talk

Property Talk

Date: 2020-03-13

Coronavirus negative impact on economy

We are facing a perfect storm. South Africans were engrossed in their load-shedding travails and the spike in emigration stats, until recently when globally a perfect storm has been unleashed. Little did we know that a bit of load shedding and emigration selling was the least of our concerns.

Coronavirus (Covid-19) fears have had an immediate and negative impact on economic activity across all industries and the financial markets responded through a massive sell-off that has left investors a little dazed and shell-shocked.

On Monday this week Wall Street closed sharply lower having its worst day since the 2008 financial crisis and this together with Saudi Arabia's announcement of the biggest cut in oil prices for more than 30 years in response to its disagreement with Russia over oil production controls, has created levels of uncertainty rarely seen in financial markets.

The Dow Jones dropped 2014 points or 7,8% on Monday. Every other major financial exchange across the globe posted similar sell-offs. Oil prices around the 34US$ /barrel are excellent news for SA. Unfortunately our Rand collapsed driving the exchange rate to 16,18 Rand/US$. What we gain on a lower oil price we lose on our exchange rate. Gold prices have moved up amidst the uncertainty, which is good news for those holding Kruger Rands and for our local Gold miners.

Although mainstream media channels can be entertaining they are typically not a great place to get accurate information. Venture Capitalists, however, tend to provide a far more considered and analytical approach and Sequoia Capital, the famous venture capital company that backed Trulia and AirBnB, released their memo to investor clients a few days ago, calling the Coronavirus the Black Swan event of 2020 which it predicts will disrupt supply chains, cause a drop in business activity, softening demand and curtail travel.

Cruise ship owners and operators seem to have been at the coal face with two mega cruise-liners in the news over infections and quarantine and experts warning people not to go on a cruise any time soon. Just travelling to a major international hub such as Dubai is risky and many people will choose to avoid this now.

As stock markets collapse, real estate may well end up as a beneficiary as people consider alternate asset classes.

What I found amazing is that the reported 30-year mortgage rate in the US hit a low of 3,29% - its lowest level in almost 50 years. My first thoughts were who issues a 30-year mortgage Unknown to South Africans, this is a full ten years longer than our maximum of 20 years. With their low rate, this makes homeownership in the US very affordable and an excellent time to buy.

As the equity markets experience a sell-off, the property market can be expected to experience a surge in demand. Similarly for South Africans, the opportunity to invest in the property side amidst all the uncertainty has never been better with relatively low-interest rates and aggressive pricing by sellers. A time of crisis is predictably a time of opportunity.