SAGIT – Property market goes up and down like a yoyo

LAND and buildings form a basic requirement for all human activity, hence the need for property investment within the market. Historically, this investment has been shown to retain its real value in the long-term. Apart from that, there i

s the assurance that the property owner has a greater proportion of control over the performance of the investment.


On the other hand, any worthwhile property requires a sizeable investment which in effect, concentrates the risk instead of spreading it. It also takes a while to dispose of this type of investment since property is not as liquid as money or equities. We should also not rule out the possibility of voids occurring within property investments, especially in the midst of economic instability.


Activity on the property market can be likened to a see-saw as evidenced by how it flourished towards the end of 2003, declined from March until the beginning of September this year and started regaining confidence lately.

Demand was high last year as individuals were investing in houses for speculative purposes until their actions were put to an end by the monetary policy released in December 2003.


As the downward spiral in inflation continues, with the rate now at 314%, prices are not coming down although the rate of increase has slowed down. Exorbitant prices are still being quoted by estate agents – roughly $2 billion for houses in the low density suburbs, around $300 million for the medium density and $150 million in the high density suburbs. As a result, the larger volume of sales has been in the medium and high densities.


Generally, if companies are posting good financial results for the year, housing loans should be more accessible to employees as some companies have deposited benefits into building societies.


Recent statistics from the Deeds Office show that they only handled property transfers of approximately $450 billion in the past eight months as sales were sluggish due to low demand. The demand levels were attributed to limits being placed on loans available for mortgage purposes, especially in the financial institutions which are, up till now, still trying to adjust to the regulations that were put in place.


Confusion has arisen as to who exactly determines property prices since real estate agents now quote amounts which they regard to be competitive with other agents without the aid of valuers. By definition, real estate agents solely sell or lease property on behalf of others. The new Valuers Act to be introduced will ensure that people qualified to value property will do so and not estate agents desiring to make a profit.


There seems to be a halt in the construction industry owing to the cash squeeze that has hit hard on companies and individuals alike. The economic slowdown and the shortage of foreign currency has impacted on the construction of high rise buildings eg the completion of Joina Centre which is hard to miss on the skyline and some developmental projects such as the National University of Science and Technology. Even as one moves around town, there are few construction sites further confirming absence of funds.


Tight liquidity conditions


In the last five weeks the money market has been in deficit positions which saw short-term interest rates firming to a peak of 130% for inter-bank rates during the first week of October and the RBZ repo rate rising from 189% to 210%. The deficits can be attributed to statutory reserve payments, lack of TB maturities and corporate tax payments. Statutory reserve payments have seen most local banks in a serious liquidity crunch which resulted in the high inter-bank rates, though the risk of default could have been a factor.


The beginning of this week saw the market opening in a reduced deficit position of $111,1 billion (October 10) compared to last weeks’ position of $149,6 billion. The reduced deficit position can be attributed to the PSF ($25 billion) which were released by the RBZ and access to the Troubled Bank’s Fund by banking institutions, which has seen short-term rates softening.


Such higher short-term interest rates than long-term rates are indicative of a tight monetary policy. Longer-term rates are likely to stay lower as investors see an eventual loosening of monetary policy and declining inflation. The monetary authorities have adopted some aspects of inflation targeting with inflation expected to be about 200% or less by year end, thus the inflation-risk premium is likely to be lower resulting in low long-term nominal interest rates.


Of more importance is how these short-term rates affect medium and long term rates. These latter two rates determine borrowing costs of firms especially in structured finance borrowing which is increasingly becoming important in Zimbabwe which is perceived to be a high-risk. Since long-term rates embed expectations of the behaviour of short-term rates, importance should be placed on short-term rates. For example, when short-term rates rise, the monetary authorities are likely to implement an expansionary open market operation (OMO) to reduce the rates which are inflationary.


Thus investors would expect an expansionary OMO. Therefore, a monetary policy tightening which generates high nominal short-term rates initially is likely to result in a quick fall back of interest rates because of its anti-inflationary effect. Since long-term rates embed expectations of the behaviour of short-term rates, they will rise by only a small amount since short-term rates will be expected to fall.


Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved.


*Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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