The bus to the buyers' market of 2008

By Coert Coetzee

The year 2007 brought many new things, the most important of which were the new Credit Act and the increased interest rates. These two changes are the main reason that we are going to have a buyers' market in 2008. People who don't understand investments, and especially those who don't understand property, panic when things happen that are out of their control. They listen to people like journalists and economists who understand even less than they do about the markets. If you're going to do that, then panic awaits you.

People who do understand the markets will know that everything works in cycles and that the only successful investors in the world are those who don't panic and who can go through these cycles without taking a knock. I was reading something recently where Donald Trump said he wasn't prepared for the decline in the property market in the early 90s and almost went under. The important lesson that he learnt there, and which he now proclaims far and wide in his books, is that you must be prepared. This is very true. A good investor is a prepared investor. With the biggest interest rate peak ever in 1998, when it was sitting at 25.5%, we knew that it would come down again. It dropped to 13% in September 2001, and then settled at 17% again the following July. (By the way, that's the highest it's been in the past eight years.) After that it dropped to 10.5% in April 2005. It's clear that interest rates always move in cycles. What goes up must come down, and what comes down must go up. Why do people then find it shocking that in December 2007 it's sitting at 14.5% again? We knew it was going to happen, just as we knew previously and will know again in the future.

This may sound strange to those who don't understand these things, but the market is busy turning in our favour. The best time ever for me was in 1998 when interest rates were at 25.5%. That was the best buyers' market we have yet had. The high interest rate was effectively negated by the lower prices. In 1998 the prices of properties at auctions dropped to as little as 50% of their value. If you buy a property at half its value, then the effective interest rate is 50% less than it would have been on full price. The year 2002 also gave us a very good buyers' market, with interest rates at 17%. Every time interest rates go up and people want to sell some of their properties for the sake of affordability, an oversupply situation arises, which forces prices down. There are then generally more sellers than buyers, and because a situation like this is more favourable for buyers, we call it a buyers' market. Since 1998 we have had only two buyers' market periods, in 1998 and 2001. All indications are that we are now entering a buyers' market again.

You'll notice that people automatically assume that when prices drop values also drop, and that's one of the main reasons that people panic and sell their properties. But values don't drop as quickly as prices, and if the price decline phase is short, then the values won't drop at all. But if the negative phase lasts a long time, then values will begin to drop as well. Fortunately that very seldom happens, because the decline phases are usually short. The decline phase of 1998 resulted in values dropping by just 1.5%, while prices dropped by up to 50% at auctions. In the decline phase of 2002 prices dropped by approximately 20%, while values increased by more than 15%.

So a buyers' market means that you get a lot more value for a lot less money. You can also get bonds more easily and with better terms, because banks are in dire need of your business due to the fact that there are so few buyers. Another advantage of a buyers' market is that the rental market does better than at any other time. Fewer people buy, which means that more people rent. So to sum up: a buyers' market is ideal for buyers, but few people understand that because they get their information and instruction mostly from the media, and to tell the truth, I have not yet met a journalist who understands the property market.

The signs indicate to me that the next buyers' market is going to be of short duration: the learned economists are already predicting a decrease in interest rates for next year. That's typically the problem with a buyers' market - it doesn't last long and one has to move quickly to take advantage of it when it makes its appearance every few years. It's now the best time since 2002 to buy property.

Whenever I tell people how easily we bought properties in 1998 and 2002, I always get the request to notify them next time we have a buyers' market, because they also want to be at the party. Well, now is the time. Don't miss the bus again. Reserve your seat now. The "property bus" departs on the 10th of January 2008 from the Monte Casino Conference Centre in Johannesburg, when the seminars for the new season kick off. See you there!

Happy House Hunting!