Eish, Kew! The Property Market Cycle in South Africa

Property markets tend to move through four phases: recovery, growth, peak and slowdown. Most people buy near the peak, when prices feel like they only go up. Nobody can time the cycle reliably. What you can do is be ready in every phase, with structure, buffer and documents in place.

Property markets move through roughly four seasons. Most people only buy in one of them.

It's usually the worst one.

What are the four phases of the property cycle?

Recovery. Prices have been flat or falling for a while. Sentiment is poor. Sellers are tired. Few people are buying, and the ones who are buying are quiet about it.

Growth. Demand picks up. Stock starts selling faster. Prices begin to rise. Confidence returns.

Peak. Everybody's talking about property. Prices feel like they only go up. Buyers compete. People stretch to get in.

Slowdown. Something changes. Interest rates rise, the economy slows, or prices simply get too far ahead of incomes. Sales take longer. Sellers start to drop prices.

Then it turns again.

That's the textbook version. Real markets are messier. Phases last different lengths of time, and they don't arrive on schedule.

What drives the cycle in South Africa?

A few things do most of the work.

• Interest rates. When the Reserve Bank moves the repo rate, bond repayments move with it. Cheaper money brings buyers in. Expensive money pushes them out.
• Jobs and incomes. People buy when they feel secure.
• Bank appetite. Banks loosen and tighten how freely they lend.
• Supply. New developments arriving in an area add stock.
• Confidence. How people feel about the country and their own future.

And here's the part the national headlines miss. Property is local. One city can be in growth while another is in slowdown. One suburb can be rising while the one next to it goes sideways.

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Why do most people buy at the wrong time?

Because the peak feels safest.

At the peak, everybody you know is buying. The news is positive. Your colleague just made money on a flat. It feels like the evidence is in.

In the slowdown, the opposite. The news is grim. Nobody at the braai is talking about property. Buying feels reckless.

But look at who has the power in each phase. At the peak, sellers do. In the slowdown, buyers do. Sellers are motivated. There's less competition. There's room to negotiate.

Investors often do their best buying when it feels worst.

Can you time the market?

No. I can't, and anybody who says they can is guessing.

You only know for certain where the peak was after it's gone. Same with the bottom. People who wait for the perfect moment tend to wait for years, and then buy at the peak anyway because that's when it finally feels safe.

What you can do is stop needing to time it.

How do you invest through a cycle?

Buy on the numbers, in every phase. A property bought well below value, with rent that covers its costs, works in most markets. A property that only works if prices keep rising is a bet.

Stress-test the interest rate. Run the deal at a higher rate than today's. If it only works at today's rate, it doesn't work.

Keep a buffer. Slowdowns bring vacancies and slower rent increases. A buffer lets you hold instead of sell.

Hold for long enough. Transfer costs make property expensive to trade. Time smooths out the cycle.

Be ready. The best deals appear when most buyers aren't able to act.

The catches

• The cycle isn't a clock. Nobody knows how long a phase will last.
• Past patterns don't promise future ones.
• Local beats national. Research the suburb, not the headline.
• A cheap price in a slowdown can get cheaper.
• I'm not telling you which phase we're in now. That's a judgement you make on current local data.

Where the company fits

You can't choose the season. You can choose whether you're ready when it arrives.

Structure in place. Buffer in the bank. Documents ready. Then when the motivated seller appears, you can say yes that week while everybody else is still getting organised. Property cycles have their own module in The Vault. Start with the container first.

FAQ

Is now a good time to buy property in South Africa?
It depends on the area, the price and your finances. A well-bought property with realistic numbers can work in any phase.

How long does a property cycle last?
There's no fixed length. Cycles have run for many years, and phases vary.

What is a buyer's market?
A market where there's more stock than buyers, so buyers have more room to negotiate. It's typical of a slowdown.

Do interest rates affect property prices?
Yes. Higher rates raise repayments and reduce what buyers can afford, which tends to slow price growth.

Should I wait for property prices to drop before buying?
Waiting for the bottom rarely works, because you only see it afterwards. Focus on buying a specific property well.

Related reading

• Is Property Still a Good Investment in South Africa?
• When to Start Investing in Property: Small and Structured
• Fixed or Variable Rate for Property Investors?

Ready to set it up properly?

The Directors Fortress gives you the investor-friendly offer to purchase, the blueprint for registering the entity, and a walkthrough of the structure I use. R99 once off, yours to keep.

Get started → zahomes.co.za/start-here

This article is general information, not tax, legal or financial advice. Speak to a registered tax practitioner, attorney or financial adviser about your own situation.

Sources

• South African Reserve Bank: resbank.co.za

About the author
Michael Bowen is the co-founder of ZAHomes. He has invested in property for over 20 years, in South Africa and abroad, and teaches investors how to buy and hold property inside a company. His philosophy: an investor's greatest assets are the lessons from their failed deals.