Which areas win and lose in tough economic times?

It's no secret that things are not looking that healthy on the economic front and there are signs that many buyers have adopted a wait and see approach before they commit to buying a new home or investment property. This is perfectly understandable as any economic downturn is undoubtedly going to affect the property market. However, according to John Loos, FNB’s Household and Property Sector Strategist, some areas are going to feel the effects of an economic slump more than others.

So what is a long term period of economic stagnation likely to bring?

Loos says in order to get a clearer picture, one has to consider what happened during the last boom and expect something that is more-or-less the opposite to that.

“A key feature of the economic and property boom of last decade was that just about everything which was called property boomed, from high value to almost dysfunctional areas, and from the relatively high economic growth regions to the long term low growth ones.

“Companies expanded their operations, not only in major cities, but often increasingly to smaller traditionally ‘ignored’ regions which were experiencing booms themselves. In the major centres prime industrial, office and retail property is in huge demand, driving up rentals and values, ultimately encouraging a greater number of businesses to look at ‘lower grade’ areas for more affordable property, areas which they previously would have bypassed.”

A similar thing happens in the housing market.

Lower interest rates fuelled what Loos says was the biggest property boom on record and suddenly everyone could afford more expensive properties. Properties in the prime areas were the first to benefit, but demand started moving into other parts of the market once these homes became less affordable.

“The massive demand, coupled with supply that for a few years could not hope to keep up, drove former black township price booms, a wave of new affordable housing developments, significant residential development, and property and area upgrades in the struggling Johannesburg Central Business District (CBD) whose decay had arguably reached its worst point by around the late-1990s.”

However, when economies slump, businesses cut back and Loos notes this often means closing down or reducing operations in smaller or worse performing economic regions. In other words, businesses tend to centralise more functions to their head offices or regional offices. This puts areas which house such entities in a relatively strong position. Loos says the most prominent example of such regions would be Gauteng, and to a lesser extent the City of Cape Town and surrounds, possibly followed by Ethekwini Metro.

“The search for property regions which will perhaps hold up better in tougher economic times (though not necessarily boom themselves), therefore probably requires a hunt for places of high GDP and Income Per Capita. At a provincial level, the two that win the game in this regard are Gauteng and the Western Cape, and we believe they will in future be the superior long term economic growth provinces.

“Within Gauteng, one probably has to look largely (although not only) to northern Johannesburg’s existing prime nodes in and around the likes of Sandton. In addition, there are the big new secure mixed use developments to the north of that emerging as the drive continues to find privatised alternatives to the city’s ailing infrastructure, services and high crime rate.”

He notes things are slightly different in the Western Cape. “Rather than seeing a move away from its CBD, the City Bowl and the sought after southern suburbs and Western Seaboard look set to remain most popular despite already ‘exorbitant prices’.”

In KwaZulu-Natal areas to the north of Durban appear to be the go-to places.

While it would be easy to assume that major centres are always going to preform better than outlying regions, there are exceptions.

“Significant wealth has gone in search of lifestyle along the southern Cape Coast to towns such as Knysna, or the City of Cape Town’s surrounding towns such as Stellenbosch. This can conceivably continue, as there is a portion of the high income population which does not have to be where the big economic action is - in the big cities. For them, there are a few select towns, arguably more pristine than the big metros, which offer them their sought after lifestyle,” concludes Loos.