House prices defy Covid-19 gloom
Lightstone’s scenarios suggest prices could rise by between 2.1% and 5.2% in 2021
Residential property prices defied Covid-19 conventional wisdom in 2020, and house price inflation ended close to 3% at the end of the year, some 2.7% above Lightstone’s forecast made at the beginning of 2020 and 6% above the highest post Covid-19 prediction.
Lightstone anticipates residential sales will continue to hold their own, and we see house price inflation at anything between 2.1% and 4%, with potential upside in the luxury sector.
Even before Covid-19 struck Lightstone forecasted that annual house growth was going to drop from 1.4% at the end of 2019 to about 0.3% at the end of 2020. We took this view because of low economic growth forecasts of about 1% for 2020 and the generally weak housing market conditions that were expected to continue from 2019 into 2020.
As news of the economic impact of the corona virus outbreak filtered through international media towards the end of 2019, its true impact was only really felt in Europe in the first quarter of 2020, and in South Africa in the second quarter.
Apprehension turned to panic in many quarters as Covid-19 worked its way into South Africa and the impact of the economic lockdown was assessed. Economic forecasts were hurriedly adjusted downwards and even the most optimistic economists were predicting an economic decline of around 10%. As it happened, this was not far from the -7.3% expected for 2020. But house prices did not follow economic growth as expected.
So why did house prices take a different path?
Lightstone, along with other economic commentators, didn’t anticipate the resilience of the house price market with even the most optimistic scenarios forecasting negative house price growth.
Predicting house prices during normal times can be tricky, but predictions amid a once in a lifetime catastrophic event became near impossible. During the last couple of years, the economic environment in South Africa did not change that much from one year to the next, and typically house prices followed that trend. A Black Swan event, which leads to the largest yearly decline in economic growth since the Reserve Bank started recording statistics, makes looking into the future all the more difficult.
To try and make sense of the impact of the economic lockdown, we looked at the financial crisis of 2008 where we also experienced a sudden drop in GDP growth. At the lowest point of the 2008 recession, the South African economy shrunk by -1.5% while house prices shrunk by -5.4%.
So, using a simple rule of thumb it seems safe to predict that if the economy was to decline by 10% in 2020, house prices would drop by the same percentage or more.