SA Steady at Junk Status – What This Means for the Property Market

Global ratings agencies Standard and Poor’s, Fitch and Moody’s dropped South Africa’s credit rating to junk status in 2017 – a rating that has been reaffirmed in the last month and is likely to take years to recover from. Junk status means it will cost more for the South African government to borrow money, creating a knock-on effect down to the consumer level – but what does this mean for South Africa’s property market?

The Junk Status Effect on Homeowners

Firstly, the rise in the cost of credit at a national borrowing level will impact on homeowners, inevitably leading to an increase in interest rates that will likely dampen the demand for property by buyers. This is a further negative impact on a property market that – outside of the Western Cape – experienced a drop in capital appreciation in 2016. As a result, these property markets will see little growth at the very least and properties are in fact more likely to drop in value.

Even the Western Cape property market, where the demand for lifestyle properties is high, should experience a dampening effect leading to lower property price increases. This will also impact on the building sector, causing a slow-down as developers have to face higher costs for funding their projects.

Another effect that remains to be seen is whether the effects of junk status will impact on current homeowners, especially in terms of increased defaults on home loans due to their rising monthly cost.

Does Anyone Benefit?

This could be a good opportunity for buy-to-let investors, however, although all buyers are likely to have to save up for bigger deposits in order to qualify for their home loans. The other segment that is likely to benefit are foreign investors, especially those who regularly stopover in the country to escape the cold of northern winters and are looking to achieve a more semi-permanent lifestyle in South Africa.

Jason Scholtz is the CEO at Envision Investments and a leader in the property and strategic investments industry in South Africa. For more investor tips and an insider’s look into the South African market, be sure to get in touch, keep an eye on this blog or visit http://www.envisioninvestments.co.za/