The fatal fault that caused all the trouble for global credit was believing that house prices in the US would never fall. After all, they hadn't fallen for 80 years. So why not lend US$100 000 to insolvents with no income, jobs or assets? When they defaulted, the houses could be sold, even at a profit. Agents could sell the insolvent another house. Everybody won, from the agents earning commissions to the politicians winning electoral kudos.
Loans were packaged with blue-chip municipal bonds by the mortgage lenders' brightest, and sliced into high-yielding collateralised debt obligations (CDOs). And they were safe. Moody's and other credit rating agencies judged the "low-risk" portions AAA. The lenders sold them to global investors awash with money, struggling with record low interest rates and low investment returns.
Except SA, where our nanny state wouldn't ease exchange controls or its high interest rate regime and let its banks play in the street with the subprime vendors. They stayed at home, lent quite aggressively and SA house prices rocketed. SA was top of The Economist's house price growth table for two years.
Some economists came up with the Case Shiller house price index. Measured their way, the index showed that US house prices had indeed fallen in the past. The US house market, CDOs, and the many banks that held them began to unravel. House price bubbles burst.
Banks went broke and the financial system began melting. Recession is certain in the developed world during 2009 and probably 2010. SA will not be insulated, but does that mean the SA house market will collapse with the rest of the world? Hardly.
The SA house market dislocated from the global property market in the politically unstable, sanctions-burdened 1970s. Except for a gold price-induced bubble in the early 1980s, real SA house prices fell steadily from about 1975 to 1998. We missed two global booms. The commercial property market swooned into the arms of the large insurers and pension funds in the face of rising interest rates.
Commercial and residential property started recovering in the 1990s. Private buyers who borrowed from the banks took over the listed property sector. Real rents and values were rising fast. The listed sector's market capitalisation - the total value of its shares - rose from R5bn in 2000 to R100bn in 2007. Despite recent falls, the listed funds are mainly underborrowed or underinvested.
Many homeowners are stressed by high debt and interest rates. Repossessions are rising but not much above their long-term trend. House prices measured by Lightstone Risk Management - in the same way as Case Shiller and other local indexes - showed SA house price growth still positive by the third quarter of 2008, despite relentlessly high interest rates. They are, however, widely expected to fall by between 2% and 10% before starting to recover late in 2009.
Resilient property fund director Jeff Zidel says limited availability of bank finance and the cost of money will make it difficult for smaller investors to finance purchases. "This will leave opportunities for the large funds that can raise finance.
"But the real opportunity lies offshore where you can get great returns on prime property," says Zidel.
