South Africa Had The Largest Property Bubble. Will Our Crash Be The Worst?

The following was written by regular reader Bean Counter:

A small piece of news that wouldn't have made it into any South African newspapers this weekend: according to a UDC economist, property prices in Ireland are going to fall 80% from peak to trough.

Let me say that again. 80 PERCENT from peak to trough.

In case that doesn't mean anything to anyone in good old sleep-walking South Africa, have a look at the graph of the Economist's figures, and see which bubble came second to our own.

We already know that the UK market is in freefall - 15% last year, another 25% estimated this year - and Spain is in deep doo-doo, as its economy based on the bubble crumbles. Lots of reports of large groups of young unemployed people spending their days sitting in town squares. For all fellow Europessimists, watch Spain carefully: it has the real potential to be become a very nasty place in the next few years. Young + unemployed + Spanish + hungry = shooting.

Finally, nobody needs an introduction to the bloodbath in the US, where liar loans were invented and where the 2009 Depression was born.

So let's look into the crystal ball, starting at the low end of the graph. If the US troughs at 30% it will have done well. God knows how far Spain will fall, but let's be generous and say it troughs at a 40% fall. Experts are predicting a total fall of 40% in the UK, but the British economy seems to be totally trashed, so I'm betting on closer to 50%. And so to Ireland.

80% sounds almost loony, but you never know. Let's be conservative, and say that Ireland will drop a total of 60% peak to trough, 20% better than the UCD people estimate.

Alarm bells going off yet? They should. It's basic maths. The bigger the bubble, the louder the pop. The higher prices rose, the further they have to fall.

Which brings me to SA, the undisputed global leader in overinflated house prices. In light of the other bubbles, is there any reason to believe we won't fall by over 60%? 70%/ 80?!

After all, our market rose by 244% between 1997 and 2005.

OK, so here's what the bulls and John Loos and Andrew Golding will say:
1) You can't compare SA to those other bubbles because our banks are healthy and our economy seems solid.
2) We're different because we had a huge segment of the population suddenly getting richer (Black Diamonds and new black elite), and that would have led to a "healthy" bubble.
3) World Cup 2010!

The World Cup is going to do exactly nothing for our economy: it did very little for Germany, and that was at the height of the boom years across the world. By 2010 the world will be picking its way out of Depression, and nobody is going to want to buy a freaking house in crime-riddle SA. So you can ignore point 3.

But how about 1 and 2? Do they hold water. I think they do, but only to a certain extent. I just don't believe that the black middle class could create that kind of supply and demand by itself.

In short I think maybe about 100% of the 244% could be ascribed to healthy, normal growth (led by the new black middle class, helping SA catch up to a normal international standard), but that still leaves 144% of speculative madness. In other words, a bubble the size of Spain's.

We will be incredibly lucky to bottom out at 40%. I think 50% is more realistic, but 60% is a possibility.

Enjoy the ride!