House prices increase and lack of retirement savings are major culprits to South Africa’s middle class losing their wealth!
Let’s say someone has to sell their house fast, maybe because they’re moving away. Then they realize that a house they bought for, let’s say, R3 million ten years ago, is barely worth that now. And it takes forever to find a buyer. That leaves people thinking a lot about how the middle class is losing a ton of wealth because the housing market is going downhill fast. Once, normally, if that R3 million house bought in 2014 kept up with inflation, it should be worth R4.9 million today.
While the issue affects all property markets, it’s especially noticeable in the R2 million and above category. This is due to emigration trends, but even seemingly affluent areas are experiencing the same with studio apartments priced around R600,000 and houses around R1.5 million.
People who still have investment properties are dealing with the same issue. They have to pay the difference between what they get in rent and what they have to pay each month for the house (like the mortgage, fees, and repairs).
House Prices Over The Years
Some charts have been going around showing how South Africa’s housing market hasn’t been doing so well lately. This is important because inflation erodes purchasing power, so considering “real terms” gives a clearer picture of how property values are truly changing over time. Traditionally, house price index charts tend to show a constant upward trend, but that’s because they don’t account for inflation. When inflation is factored in, the picture can be quite different.
Comparing prices to the peak in 2007/08 isn’t totally fair. After the global financial crisis, prices went back down to more normal levels and stayed about the same for ten years. They barely kept up with inflation.
But in the last three years, house prices haven’t been going up as fast as inflation. Data from the Bank for International Settlements via the St Louis Fed’s FRED (Federal Reserve Economic Data) tool shows how much they’ve dropped.
The economy isn’t doing great, interest rates are high, there’s power outages, and more people are leaving the country than usual. All of this means the residential property market is struggling.
Losing Their Wealth
For a lot of middle-class South Africans, most of their money is tied up in their house and their retirement savings. Homeowners viewed their paid-off houses as a way to boost their retirement income. The idea was to sell them closer to retirement, pocket the equity gained from appreciation (essentially cashing out their home’s value), and move to a smaller, more affordable place. This profit from downsizing would then be used to add to their existing retirement savings.
But if their house isn’t worth as much as they thought, especially if they’re close to retiring, it could be a big problem. If their retirement savings were doing well, it might not be so bad. But lately, they haven’t been.
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