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By Motseare Tsosane
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The biggest fallacy in the world is that property and land prices always go up.
If that was true, we would all buy land and houses then sit on our hands and wait to become millionaires. BUT it is not that easy. Housing prices in the United States have dropped by 30 percent to 40 percent depending on the state you are in, while in neighbouring South Africa they have fallen by as much as 17 percent.
Yet an increasing number of Basotho continue to pour more money into real estate hoping to rent-it-out or sell it at a profit in the future. We have forgotten the all-important lesson we were taught by the popcorn machine. Every unregulated industry with high profit margins self-destructs. There was a time when there were popcorn machines followed by long queues at every corner of Maseru. Today they are dead and forgotten.
So I ask, what is the next popcorn machine? Voila, in come property, land and construction. From Masowe, past Thetsane Ridge, via Katlehong, through the Golf Estate View, to the heights of Mpilo Estate, million-maloti houses are popping-up everywhere. New property developers and real estate agents are born every day to jump onto the gravy train. In the foreground, land prices start doubling from Koalabata all the way to Ha Penapena. Wow?Either a group of millionaires have moved into town and are looking for houses that complement their status or all of this is madness. Surely, we as Basotho have not witnessed an economic uptick and a drastic improvement in our living standards. Or just maybe and I mean maybe, MKM?s spending-spree as it overpriced property, in the industrial area, Maseru West to Khubetsoana, triggered all this.
As land and house prices start to border on the ridiculous, property developers and agents have introduced a new terminology to ease our conscience, ?Prime area?. So again I ask: What makes these locations ?PRIME?? We are not only short of space in Maseru, but we also have a decreasing population. Surely they cannot be ?PRIME? because of distance, because Maseru is so small a town that someone who lives as far as Ha Foso can make it to work by 8am if they wake up at 6am. Maybe the nearby tar road is an added benefit, but it will be washed away in three years and it will take another five to 10 years to fix. This was the case with Ha Thamae.? Does this concept of ?PRIME AREA? really exist outside of old established suburbs such as Maseru West, Old Europa and Hill?s View? I do not think so. It will not exist so long as Ntate Sam Matekane?s neighbour lives in a two-roomed house of grey, block brick. If Matekane?s site is worth a million, then his neighbour? site is worth at least half a million and we all know that is not the case.
So who can afford to buy or rent these million-maloti houses? The common answer is NGOs, embassies and foreigners. We fail to acknowledge that embassies are closing down and operating out of Pretoria, South Africa. The few left will prioritise security and provide demand, but not increase demand to meet the increasing supply.? Meanwhile, NGOs are cutting back due to limited donor-funds, and are primarily focusing on big expenses such as rental. At this juncture, the developers and agents who are pocketing anything between 20 percent and 40 percent profit margins say, ?Do not worry, there is Metolong and LHDA Phase Two. They will need housing.?
True, but only during the construction phase of the projects. Upon completion, they leave the houses vacant and only key maintenance staff, which reside on site, are left behind.
At this point, everybody in the room shouts at me, stop being ignorant and stupid. A lot of upper middleclass Basotho are buying these houses. The banks are financing them. Ahhhha?So could it be that the only reason this market exists is because banks are providing financing at a time when interest rates are at a 15-year low? Interest rates are the cost of money. Given that the South African Reserve Bank (SARB) * has cut interest rates by more than half, from the high of 2008 to 5.50 percent, money and credit is cheap for all. When things are cheap, everyone is a buy. Human nature dictates that rather than buying what we can afford at a reduced price when there is a sale, we tend to buy what we always wanted but could not afford. This means we go to a sale and spend the same amount of money we would have spent under normal circumstances and exhaust our credit limit. Unlike a winter clearance sale at a retail store, the sale of cheap credit is not a once-off transaction that ends when you leave the store. It is a 20-year affair. To make matters worse, the salesman might change their mind and say ?the sale is over, pay-up in full?. When you ask, but how??? The salesman explains that the SARB has commenced monetary tightening. They have raised the repo rate by 600 basis point to mitigate the threat of inflation, which is expected to breach the target band in the third-quarter of next year. As a result, banks? prime lending rates have also ticked-up given that the repo rate is the benchmark rate. ?What!!!!!!? This means you will have to pay an instalment 25 percent higher for the remainder of the 20 years to keep your house. Tragically, you do not have headroom or savings because when you were told how much credit you have access to, you exhausted it and bought the house of your dreams. How likely is this scenario I am presenting? Well, if interest rates have been cut by half over the past three years, what stops them from doubling in the next three?
I foresee a crash in Lesotho?s property market in the next five to eight years. It is inevitable that inflation will rise due to all the stimulus and loose fiscal policy adopted by governments worldwide. This will trigger the start of the interest rate hike cycle. All Basotho who bought overpriced houses which they could not afford, not knowing rates would not stay low forever will feel the squeeze immediately. Rental will not rise at the same pace given limited pricing power due to excess supply. People will find cheaper housing. After all, what benefit does a M15,000-a-month mansion offer other than high electricity bills? Defaults on home loans will rise. Repositions will follow suit. When the auction ends, the truth will be revealed. The properties were overvalued between 20 percent to 40 percent. Wealth will be lost and livelihoods shattered.
*If the SARB reduces interest rates, the same happens here in Lesotho. Feedback: motseare21@hotmail.com
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