The current increased levels of inflation, high interest rates, stagnant global and local economic growth combined with high unemployment have led to deliberations between experts that South Africa might be heading towards a period of economic stagflation. If this is the case, it is good to keep in mind that real estate is an effective way of storing value, says Antonie Goosen, Principal and Founder of Meridian Realty.

According to Goosen the slowdown that accompanies stagflation would mean that there are less people involved or participating in the economy. That means GDP numbers go down and, more importantly, earnings numbers are affected through corporate profits. “So, from an investment perspective that places pressure on the equity market and this is where real estate will store value. This asset has traditionally been effective in the long term. Inflation causes the cost of raw materials, goods, or labour to rise, meaning that there will be more expensive homes on the market,” says Goosen.

He says during periods of stagflation, building contractors will continue to expand their construction of homes to meet consumer demand. The need for real estate is constantly increasing, given a more significant population. Stagflation does not decrease demand for homes; however, it causes supply to stagnate and reduces the affordability of completed houses.

The physical number of completed buildings slows down because of the prohibitive cost of construction and persistent supply chain problems. It is a disadvantage for contractors and potential homeowners; however, it is an advantage for existing homeowners. These variables mean that their homes are in greater demand and will appreciate.

Goosen says the inflation that comes with stagflation is related to the interest rates in the country. Consumers looking to purchase a home in 2022 are significantly affected by the money supply in the economy. There are fewer prospective home buyers as the government attempts to slow down inflation. Given the effects of the Covid 19 pandemic, many building materials have increased in cost while wages have remained constant. This feature makes it difficult for new homes to be priced affordably.

The SARB will try to rein in inflation by increasing interest rates. Higher interest rates mean less money supply in the economy. Consumers and businesses are unlikely to borrow when the interest payments are high. This measure leads to reduced economic spending and can cause a recession.

“With the prime lending rate now at 9.75%, homeowners might have to look at ways to minimise the effect on their bond repayments. Property pegged at a fixed-rate mortgage is safer because it is immune to inflation. The price for homes often appreciates as time passes, while the mortgage prices remain the same. Consumers without a fixed-rate mortgage will have to pay a higher home fee,” he notes.

“Real estate owners who buy homes with mortgages will gain value through the high inflation experienced during stagflation. It also allows homeowners to charge higher rentals regardless of the stagnating economy. A higher valuation in inflation-adjusted terms may stagnate at first, but after five years, the home will return to its actual market value,” says Goosen.

According to Goosen we are not yet in a situation of stagflation in the property market in South Africa. “True stagflation in real estate happens when buyers are not able to buy and sellers are unable to sell or unwilling to sell at lower prices. The property market has proved to be resilient in times of economic turmoil and should continue on its current trajectory for the remainder of the year, albeit more in the higher end property market,” he concludes.

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