The Place of Property in the Economy
Posted on Thu, Feb 25, 2010
It is vital for anyone with a vested interest in the property market to understand the affect the economy has on the real-estate environment.
There are three types of indicators on the economy: lagging, coincident and leading indicators.
Leading indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are unfortunately a lot less accurate. These include the increase or decrease in the production workweek, building permits, or unemployment insurance claims.
A lagging indicator is one that follows an event. The amber light is a lagging indicator for the green light because amber follows or comes after green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. Rising unemployment is indicative of an economy moving into negative territory.
Coincident indicators occur at approximately the same time as the conditions they signify. In our traffic light example, the green light would be a coincidental indicator of the associated pedestrian walk signal. Rather than predicting future events, these types of indicators change at the same time as the economy or stock market. Personal disposable income is a coincidental indicator for the economy: a strong economy usually means people will spend more.
Into which category should real-estate be placed?
Dieter Deppisch, head of Property Data Research at Knowledge Factory explains: “In general, the performance of real estate is a lagging indicator, one that follows the event. For example, as the economy starts to suffer and disposable income declines, debt levels rise, unemployment becomes a risk and the chance that people will qualify to purchase another house becomes less and less likely. Real estate, involves human activity – where people live, work or shop. People buy homes and shop at malls, blue collar workers go to factories and warehouses, and white collar workers commute to office buildings. All of which requires the purchasing or leasing of some type of real-estate. So while we may have seen the back of the recession, technically speaking, we have some way to go before we see a recovery in the real-estate market.”
South Africa has lost 890,000 jobs since the start of the recession. Employment, like real estate, is a lagging indicator. The natural tendency for employers is to avoid layoffs because they recognize that recruiting a strong and qualified workforce is difficult at the best of times. Yet there comes a time when employers have no choice but to aggressively trim their workforce.
Commercial real estate decisions are subject to more constraints such as lease agreements. Major changes normally cannot be implemented until a lease expires or property is sold. As an indicator, real estate, therefore, lags even more than employment. Just as responses to a recession are slow to begin, unfortunately positive responses trail on the recovery side as well.
Government is committed to increasing the workforce and reduce unemployment. Large capital projects have been given the thumbs-up by Treasury. World Cup euphoria has engendered a national spirit of patriotism last seen in 1994. Deppisch elaborates:” Our CPI inflation is hovering at the upper end of the target range and is expected to remain contained for most of 2010. Interest rate cuts made last year are still meandering their way through the market and will positively influence property sales. But many risks for our emerging market economy remain, not the least of which are oil prices, the circus at ESKOM, leftist political influences and alarmingly high debt levels.
Knowledge is the key and if you are in the market to buy, sell or lease, ensure you get data that is accurate and current.