We will not experience the property market peaks of 2006/7, followed by the recent declines in property prices and ever-increasing bank foreclosures again in the foreseeable future. To avoid this rollercoaster effect of booms and busts, many world economies have increased their government intervention in business. Not good for capitalism, but a necessary evil to protect the innocent and ignorant.
While the directors of Lehman Brothers were still convinced that they were running a stable organisation, South Africa gave birth to the National Credit Act (NCA) in June 2007. Because of this, coupled with other regulatory measures in place, our financial markets ranked 5th out of 133 countries in the latest World Ecomomic Forum's global competitive index. Furthermore, our banking sector was one of the few that survived the recession without government bailouts.
The NCA's main objective is to protect consumers from reckless borrowing, over-indebtedness and optimistic consumerism. In other words, if you can't afford it, you shouldn't be buying it. The NCA and the banks' lack of appetite for risk have made it difficult for property buyers and investors to obtain credit.
Will this change when the banks lighten their credit criteria? Perhaps, but very slightly! The NCA is here to stay! In order to avoid prosecution due to reckless lending, the banks still will have to prove that a property buyer can indeed afford the monthly installments on their mortgage bond. Gone are the days that a mere letter from your accountant stating how much you earned sufficed. Buying "bulk stock", which stimulated the property market between 2006 and 2007, will also be a thing of the past, as your interests in different entities and property transactions are now exposed through the various credit bureaus and registers.
Following the NCA government introduced The Companies Act 71 of 2008, which will come into effect around July 2010. The Act makes provision for distressed companies to apply for business rescue without informing their creditors, suspending any legal proceedings against these companies. Once notified, the creditors may apply to a court to have the appointment of a business rescue practitioner set aside.
Faced with The Companies Act 71, one can understand that creditors and bankers will be a tad more cautious when extending credit to companies. This will have a detrimental effect on the commercial property market and even to some extent on the residential property market. Many investors purchased property in the name of a profitable trading company to benefit from having property related holding costs as a deductable expense in the name of the company. Furthermore, trading companies also benefit from Section 13 (Ter) of the Income Tax Act when purchasing newly developed residential property. The Companies Act will put a damper on this market segment.
Close on its heels is the Consumer Protection Act 68 of 2008, which will be introduced over a two-year period. The Act protects consumers from unfair business practices. Like any other industry, the property market has also been tarnished with its fair share of unethical business practices, but how this act will be applied in the property industry remains a subject for the legal eagles. The act covers relevant topics such as the right to select service providers, bait marketing, limitation of supplier/seller liability (e.g. the "voetstoets" clause in property contracts) and sale agreements drawn up in understandable language.
With all these interventions in place, the future of the property market will not be "business as usual", no matter how much the interest rates are cut or the banks ease their credit criteria. As Pravin Gordhan said after the G20 meeting "there will be no return to the old normal". This is the dawning of the "new normal".
One can never say never, because it's human nature to forget the mistakes of the past when the pain of such mistakes has subsided. However, we may not experience such distressed property prices in the near future, at least not in this generation. Those who can afford to take advantage of the current market conditions must do so sooner rather than later. As Louis Pasteur once said, "chance favours a prepared mind".
For more information contact Tess Rodrigues on 0861 106 306 or send an email.
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