Posted: May 25, 2010
Minister Davies Addresses the 2010 Association of Real Estate Licence Law Officials (ARELLO) District 6 Meeting
Mr Gary Isom: ARELLO President
Nomonde Mapetla, CEO Estate Agency Affairs Board (EAAB)
Ladies and gentlemen
When my predecessor as Minister of Trade and Industry addressed this event in 2005, the South African residential property market was experiencing its longest consecutive period of expansion, coinciding with the longest period of sustained economic growth in over 50 years.
That picture has changed dramatically. The world economy has passed through the deepest economic recession experienced any time since the Great Depression of the 1930s. This global crisis was not of our making. It had its origins in the bursting of a financial bubble in the developed world – a bubble caused by a proliferation of speculative activity fuelled by a hands-off approach by regulatory authorities. Notwithstanding the origins of this crisis, South Africa was affected through significant job losses and losses in industrial capacity.
Although we saw signs of recovery during the last two quarters of 2009 with a gross domestic product (GDP) growth rate of 0,9% in the third quarter and 3,2% by the fourth quarter; the recovery is tentative and remains fragile and uneven. Events in the European Union (EU) highlight realities that there is still no guarantee against double-dip recession in the world economy.
South Africa’s response to the crisis continues to shape the environment within which business activity takes place in our country. Unlike the developed world we did not-fortunately- experience a systemic financial crisis, due to a combination of factors. They include exchange control and the National Credit Act which limited “reckless spending”. And unlike the developed world, where massive financial sector bailouts were necessary, we instead established a process for mitigating the impact of the crisis, called a “Framework Response to the International Economic Crisis”. Amongst others, a R2,4 billion “worker layoff training scheme” was established as an alternative to retrenchment, to allow workers who would otherwise have been laid off, to prepare themselves to take up employment opportunities as the recession ebbed. In addition, South Africa’s major development bank, the Industrial Development Corporation (IDC) set aside R6,2 billion to assist firms distressed as a consequence of the crisis, in key targeted sectors, especially manufacturing.
Going forward, we will continue to assist firms in distress wherever viable but another feature of this crisis is that it served to make more noticeable a fundamental structural problem in South Africa. This problem is best described in summary, by the fact that even before the crisis, when the South African economy recorded its longest period of sustained economic growth our growth was fueled by an unsustainable credit-driven boom. The consumption side of the economy grew at more than double the rate of the production side between 1994 and 2008, including significant implications for the property market, (which I will refer to later). This growing divide between production and consumption led to unsustainable imbalances, particularly a growing trade deficit externally financed by short term capital inflows associated with the global commodities boom. One result was that even at the height of the pre-crisis boom– between 2005 and 2007 – unemployment never fell below 22,8% under this growth path. These realities together point to the stark fact that the unemployment crisis we face in South Africa is fundamentally structural in nature, even though it was worsened by the impact of the global economic crisis.
To address this problem of the production/consumption imbalance at a fundamental level, we have argued that as government, together with business and labour, we must facilitate diversification of our economy beyond our current reliance on traditional commodities and non-tradable services. This requires the promotion of increased value-addition per capita characterised particularly by movement into non-traditional tradable goods and services that compete in export markets as well as against imports.
It is in this context that a National Industrial Policy Framework (NIPF) was approved by Cabinet after consultation with all the key stakeholders. Accompanying this Framework is a series of rolling industrial policy action plans, the second of which was recently released.
This action plan, ‘IPAP 2’ is fundamentally a policy and action plan designed to help build South Africa’s industrial base in critical sectors of production and value added manufacturing which are largely labour intensive. It is designed therefore to address the decline in our industrial and manufacturing capacity and contribute to the reduction of chronic unemployment.
It draws on the theory and practice of other developing peer group countries, builds on the policy perspectives of the NIPF and reflects on and builds from the practical experience of the recent past. It is premised on the understanding that it is one pillar of the New Growth Path, comprising a larger set of inter-related policies and strategies, brought together under the Economic Development Department (EDD).
IPAP 2 has four horizontal or transversal themes around which a number of interventions are built, namely; industrial financing, procurement, competition policy and developmental trade policies. It is has thirteen vertical sector strategies clustered into sectors whose potential require new and sustained support; those established sectors which require the scaling up of interventions and those that demonstrate great potential over the medium to longer term. IPAP 2 sets out the economic rationale, the key constraints and opportunities, the key actions plans (KAPs), the lead and supporting departments and agencies and quarterly milestones for all of these interventions across departments, state owned enterprises (SOEs) and public agencies. It requires greater levels of policy coherence and programme integration across departments and agencies.
Ladies and gentlemen, I have addressed these issues very briefly and at a high level to provide you with some insight into the economic policy developments here as I believe they will shape the context of opportunities in our country for property professionals. Dealing more specifically with the evolution of the property market in South Africa, I believe that South Africa had a speculative asset bubble in real estate during the period 2003 to 2007. According to statistics from ABSA bank, the real (after inflation) price increases for (houses less than R3,1 million) was 30,4% for 2004 and 18,6% for 2005. Banks were providing a significantly increased amount of loans for house buying – and the number of people buying second and third homes for speculative reasons, increased.
Whilst speculative activity was picking up here, we know well what happened in the US sub-prime meltdown and the impact this had on poor communities in the US. The sub-prime crisis was essentially the result of banks and mortgage companies overextending credit to lover income people. They were able to do this because they then turned mortage loans into securities that were sold around the world as investments in US property; because those involved in these activities were indifferent as to their impact on poorer communities. I understand that over two million US families lost their homes and that nearly four million families in total were affected. In this sense, it could reasonably be argued that the real estate industry in the US should share some of the blame. And this raises the question what are the lessons for us?
While SA financial institutions on the whole were prevented from large scale buying of US toxic assets, including securitised repackaged subprime loans, and therefore did not experience systemic instability when the subprime bubble burst – the South African banks did start to emulate the behaviour of their US counterparts. They increased their leverage. They loosened lending criteria and gave people loans for up to 115% of the values of their property. The National Credit Act was introduced precisely because of government’s concerns that financial institutions (some banks as well as micro-lenders) were entering into abusive credit relationships with their clients. So while South Africa was not directly affected by the sub-prime crisis there was a need to further monitor and regulate behaviour of South African credit providers when they lend, including for property purchases. Today we hear from the National Credit Regulator (NCR) that over 45% (over 10 million people) of credit-active South Africans are three months or more behind on their debt repayments. The banks, and to some extent estate agents, have to reflect on responsibilities in this regard. For instance there is a recent case of one major bank being found to be involved in exploitative practices by giving a loan for a house for more than R400 000 with monthly repayments of over R4 000 per month to a person earning less than R4 000 a month.
In summary, South Africa may not have had a financial meltdown but misallocation of finance to speculative activities in real estate as well as financial transactions involving extension of high levels of credit for consumption had a hugely negative impact on the country’s economy. It has left us less able to respond rapidly to the financial crisis because we have lost ground in industry and productive sectors. What does this mean? It means that the real estate industry will have to engage in some significant adjustments. I want to challenge you as real estate professionals in South Africa, to think about how you contribute to the collective effort to address the structural imbalances inherited as a result of past actions. For instance, there remain far too many South Africans without decent shelter. In this regard what is the potential role of estate agents associations in helping government deal with provision of decent housing for the poor? In this regard how do you identify your primary role and business models? Is it one that focuses only on selling expensive houses to higher income and foreign buyers? In respect of the latter, in as much as government is broadly supportive of not shutting our market to foreign buyers, real estate foreign direct investment has much lower priority for us than fdi in productive sectors. Investment in productive sectors will create jobs whereas investment that will cause our land to be sold off and may even promote speculative bubbles in real estate prices, are clearly unattractive in terms of the current needs and growth trajectory of our economy. Finally what is the demographic composition of real estate professionals in South Africa? Is it becoming more representative of demographics, or still preserve of the few?
To conclude, ladies and gentlemen, we believe that new times need new approaches. The real estate sector in South Africa offers real business opportunities, but realising these will require a more sustainable basis. I trust that the deliberations to this point and beyond at this event, will address some of the themes we have raised here and also provide an opportunity to share international experience with the impressive list of international guests assembled here.