Inflation up but interest rates steady

The consumer inflation rate was higher than predicted, rising to 4,6% in May and up from 4,2% in April but economists have not yet revised predictions on a hike in interest rates by the Monetary Policy Committee of the South African Reserve Bank.

SARB’s repo rate was cut to just 5,5% in November last year, dropping interest rates for consumers to a record low of 9%. A spike in interest rates will place considerable pressure on property owners, as many of them try to downscale their costs in orderto meet their monthly commitments.

Elna Moolman, an economist at BJM Renaissance, says that the latest data is unlikely to mean that the interest rates will start to rise earlier than predicted even though the SARB has revised its estimates for higher inflation over the coming months.

The figures indicate that the inflation rate will remain within the Bank’s target range of between 3% and 6% for the rest of this year but will increase to about 6,3% early next year when rates are expected to be hiked.

The spike in inflation rates has been prompted by higher-than-expected increases in food prices, which are up 1,7% month-on-month. Food prices have a weighting of about 15% in the price basket used to calculate the average inflation rate and these rose by 6,3% year-on-year.

Moolman says that adverse weather conditions prevailing throughout the country, coupled with a fall in output from the agricultural sector were contributing to higher food prices.

Higher electricity prices, along with a sharp increase in fuel prices had also contributed to the spike in the inflation rate. Electricity prices have risen by 19% in May compared with a year ago.

Rising from the Rental Market grave.....

Data availability for the rental market is far less comprehensive than for the home buying market in South Africa. However, with what data we have it would appear that the fundamentals of the rental market may be improving, and this may lead to rental market strengthening in 2011.

During the property boom years, buy-to-let buying of residential property was taking place at a far greater pace, implying that the supply of rental stock coming onto the market was growing rapidly. This appears to no longer be the case. In the fourth quarter FNB Estate Agent Buy-to-Let Survey, buy-to-let buying remained at a lowly estimated seven percent of total buying, unchanged for the second successive quarter and a far cry from the estimated 25 percent back early in 2004.

This buy-to-let weakness comes as little surprise, with the household sector still under very significant financial pressure as well as being highly-indebted, while banks’ credit criteria remain conservative by the standards of a few years ago. This not only constrains the supply growth in rental stock, but also keeps a greater number of would-be first time home buyers in the rental market for longer than would otherwise be the case, thereby supporting rental demand.

In addition, very low house price inflation means that our property-related real prime rate (i.e. adjusting prime rate for house price inflation) remains positive (+5.4 percent in December 2010). This curtails the short term speculative component of buy-to-let buying, where buy-to-let buyers are more focused on profiting through short term capital growth on property outstripping interest rates. This form of buying is believed to have been far more significant during the boom years when at one stage during 2005 the property-related measure of the real prime rate was negative to the tune of -25.3 percent, a speculator’s paradise.

Low interest rates and growing economy = better quality of tenant

According to credit bureau TPN, there has been a broad improvement in the quality of tenants since early-2009. As at the first quarter of 2009, only 71 percent of tenants on TPN’s records were "in good standing". During the second and third quarters of 2010, this percentage has risen to 82 percent and 81 percent respectively, the highest percentages since back in the first half of 2008 prior to the national recession. Yes, many tenants, like home owners, were also affected by recession and high interest rates back then. The more recent apparent improvement in tenant quality also bodes well for an improvement in the rental market.

Rental inflation accelerating

Given the lack of supply growth in rental stock, and reason to believe that significant financial barriers to entry to home ownership exist at present, it came as little surprise that we started to see an upward turn in StatsSA’s CPI home rental inflation survey numbers. Done on a three-monthly basis, inflation in actual residential rentals rose from 4.5 percent in June to 5.6 percent year-on-year in the September survey. This represents a turnaround from a steadily decelerating rental inflation rate since back early in 2009.

The initial rental inflation rise nevertheless points to a still financially pressured household sector, with "smaller being better", and thus the fastest rental inflation acceleration took place in the flats category (8.6 percent, up from six percent). By comparison, townhouse rental inflation measured 4.4 percent, moderately up from four percent in the previous quarter’s survey while house rental inflation was virtually unchanged from the previous survey.

2011's rental inflation important for buy-to-let recovery

A lack of buy-to-let demand in recent years, especially through 2010, implying slow growth in rental stock, is crucial to our belief that we will see some acceleration in rental inflation through 2011. In addition, given our expectation that consumer price inflation will gradually rise further through 2011, after two successive months of increase late in 2010, it looks increasingly unlikely that the SARB will cut interest rates any further for the time being at least, and sideways movement in rates through 2011 is anticipated. This may put the brakes on first time home buying, keeping more would-be home buyers in the rental market and thereby supporting rental demand.

An expected rise in rental inflation in turn has two possible effects. Firstly, given very low expected house price inflation, we believe that gross yields on residential property will rise through 2011, and this is a key pre-requisite to larger numbers of investors returning to the market at some future stage. Secondly, however, it can have the shorter term effect of contributing to rising consumer price inflation which could ultimately mean rising interest rates (although Firstrand only expects interest rate hikes to commence early in 2012).

In the fourth quarter 2010 FNB Estate Agent Survey an increased portion of the sample of agents expected an improvement in first quarter 2011 buy-to-let buying. This drove the FNB Buy-to-Let Confidence Indicator slightly higher to 0.065 (scale +1 to -1) from a previous quarter’s low point of 0.045.

This is an interesting turn in estate agent sentiment after five previous quarters of deterioration. In our own opinion, any noticeable improvement in buy-to-let buying may take somewhat longer. However, we do believe that the fundamentals that ultimately drive the buy-to-let market (i.e. a stronger rental market and higher yields on residential property) should improve significantly through the course of 2011, setting the buy-to-let market up for strengthening at a later stage.

Overview on South Africa property market

14 April 2010

Where it's at and where it's going.

The South African property market is slowly gaining traction and provided lending institutions loan in a responsible manner and interest rates stay down, the market should grow by a positive, albeit modest, 9% this year.

Despite predictions that the local property market wouldn't start showing signs of recovery until 2010, things started to look up towards the end of last year and the market is already on an upward trend.

We were all prepared for a particularly gloomy 2009 but the market stabilised by September and house prices began rising by the end of the year. We believe that 2009 was nowhere near as bad as had been predicted. In fact, we believe it was actually a relatively good year for the South African property market, particularly in comparison with 2008, which was pretty dismal indeed.
Overall, the volume of property sales rose by 46% and turnover increased by 42%. House prices declined by 5% owing to the first two quarters of the year. Geffen is confident that the housing market will maintain this upward momentum as long as interest rates stay down.

There is still an excess of housing stock, particularly in certain price categories. This is due to repossessions and houses up for sale by owners who found they'd financially over-extended themselves as the recession took hold. Furthermore, stricter lending criteria and the National Credit Act have made it difficult for potential buyers to secure housing loans.

On the whole, there was waning interest in property because people were either too financially-strapped to buy houses or, against the backdrop of what was happening in the global housing market, decided that investing in property was too risky. All of this contributed to a lack of buyers and an over-supply of houses for sale. However, demand is picking up. To give you an example, this year we saw the especially notable sales of a property in Bryanston for R50 million and another in Sandhurst for R35 million. Also, the overall sales volumes being logged by our offices are currently 46% ahead of the volumes recorded at this time last year, and turnover is up a whopping 42%.

A slack in banks' lending criteria would be welcome because it would enable more people to qualify for loans and buy houses.

This would certainly help to stimulate movement and growth in the market. More importantly, it would give more people a chance to own their own home. However, lending institutions must lend responsibly otherwise it could be detrimental.

Geffen's advice to homeowners is to upgrade their properties now while the market is still warming up.

No stimulus for property market

The property market will have to get by without the stimulus of a series of rate cuts, as it is unlikely to enjoy much interest rate relief during 2010.

The property market will have to get by without the stimulus of a series of rate cuts, as it is unlikely to enjoy much interest rate relief during the course of 2010.

This is the word from Brian Falconer, CEO of Colliers Residential in response to the SA Reserve Bank Monetary Policy Committee's decision to leave the repo rate unchanged. It has now remained unchanged since August last year, at 7%.

This leaves the prime rate at 10,5%, which is still too high to stimulate the property market, says Falconer.

"We can understand the Reserve Bank's reluctance to afford debt-strapped consumers a further 50 basis point cut, but it is disappointing that our interest rates remain so high," says Falconer.
"While there are a few signs of recovery in the property market, notably in upward house prices, other indicators remain negative.

"For instance, the total value of building plans passed by larger municipalities decreased by 23,1%, or R17,4 billion, in the first 11 months of 2009, as reported by Statistics South Africa.
"This is a true leading indicator, and it tells us that consumer and investor confidence in the property market remains low.

"Of particular concern to us is the fact that the largest decrease in approved business plans was for residential buildings, which fell by 38%, or R13.9 billion. This is a clear indication that the market will remain sluggish during 2010 without the external stimulus a rate cut would have provided."

While Falconer has understanding for the Reserve Bank's decision, he points out that there was significant favourable data to have led to a different decision:
At 5.8%, inflation is under control. Specifically, food inflation did not spiral out of control over the Christmas season.

Festive season retail figures were down at their lowest level for a decade, according to preliminary sales data.

While some commentators have viewed this as a consequence of job losses caused by the recession, another view is that people are concerned about incurring additional debt - credit extension was down 1,59% year on year in November 2009.

This would mean that the Reserve Bank's policies regarding credit have succeeded in their intent.

Despite the record cold snap in the northern hemisphere, oil prices have remained lower than expected, keeping a lid on inflation.

Against this, though, are the looming Eskom price increases and anticipated inflationary inputs from the Soccer World Cup.

"On balance, the Reserve Bank may have made a decision that is in the country's broader interests, but from a property perspective, we would hope for a little more latitude next time around," says Falconer.

"The property market needs positive stimulation, and we hope it will come around later this year. But for now, we have to get by with what we have".

Source: I-Net Bridge

South Africa - Exchange controls: limits and red tape relaxed

PRETORIA - Treasury has announced several measures designed to reduce the administrative burden of exchange controls. The limits of some exchange controls have also been relaxed, allowing individuals and business more freedom to put money overseas.

The Mini-Budget Statement says that South Africa continues to welcome foreign direct investment and encourages local firms that wish to diversify offshore from a domestic base .

One of the proposed reforms is to increase the amount a company may invest offshore tenfold, from the current limit of R50m to R500m. For individuals, the foreign capital allowance has been increased from R2m to R4m. The single discretionary allowance has been increased from R500 000 to R750 000.

The following relaxations are proposed for business transactions:

SA companies will be allowed to invest in Southern African Development Community (SADC) member countries through offshore intermediaries. The relaxation excludes investment in member states that are part of the Common Monetary Area.

Increasing the current R50m limit for company applications to undertake outward investment to R500m. Applications below this limit will be processed by authorised dealers, subject to all existing criteria and reporting obligations.

Removing the 180-day rule requiring companies to convert their foreign exchange into rand. However, South African companies are still required to repatriate export proceeds to South Africa.

Doing away with the R250 000 limit on advance payments for imports.

Allowing South African companies to open foreign bank accounts for permissible purposes without prior approval, subject to reporting obligations.

Replacing the current paper-based monitoring system of exports (Form F178) with a more efficient electronic system in due course.

Treasury is also trying to boost foreign direct investment by relaxing borrowing restrictions for non-residents. It has abolished a rule which restricts borrowing for foreign direct investment by non-residents to a ratio of 3:1. According to this rule, non-residents must invest R1 for every R3 borrowed locally.

After it's abolishment, they will be able to finance 100% of their investment. However, the relaxation does not apply to emigrants, the acquisition of residential properties by non-residents, or any other financial transactions - such as portfolio investments, securities lending, hedging or repurchase agreements - by non residents. For these cases, the existing finance ratio of 1:1 still applies.

More announcements on these reforms will be provided in due course by the Reserve Bank, whose task is to police exchange controls.

It's property time!

The Reserve Bank has probably cut interest rates for the last time this year, which means it is time for cautious or hesitant home buyers to take the leap and enter the market, said Brian Falconer, CEO of Colliers Residential on Tuesday, in response to the decision by the bank's Monetary Policy Committee to hold the interest rate at seven percent.

Falconer said since December R3555 had been put back in the pockets of bondholders for each million loaned.

This had reduced pressure on homeowners and pumped billions back into the economy for discretionary spending rather than the servicing of debt.

"It is highly unlikely that this round of interest rate cuts will continue this year," said Falconer.

"We should view this decision as signalling the end of eight months of interest rate cuts, which means it won't get better, and potential investors should no longer continue to defer their entry into the property market. We don't see the market getting any easier than it is today."

Market has been sluggish

The market has been sluggish for more than a year since it became evident that South Africa was also entering the global recession triggered by the US subprime crisis.

Buyers have not found sellers, sellers have been unable to obtain the bonds they did two years ago, and the banks have been fearful to extend credit given that the cause of the recession was related to property credit, and due to the lack of liquidity in the market.

"There are very positive signs that the worst is over, so any further procrastination would be unwise," added Falconer.

We have noted that Standard Bank, for one, has relaxed its lending criteria, and at least one other bank is advancing 100 percent loans for low-end property."

Other positive signs, said Falconer, are:

Globally the word is that the worst of the recession is over.

- Several US banks are reporting high levels of profitability.

- Albeit with government incentives, such as the Cash for Clunkers initiative, the automotive market is starting to turn, both in the US and Europe.

- Inflation is declining to just outside the Reserve Bank's target range.

- The oil price is relatively low, but volatile and likely to start climbing ahead of a northern hemisphere winter.

- The rand has been strengthening ahead of the MTN-Bharti deal, and the gold price has surged through $1000 an ounce.

- South Africa's balance of payments remains positive, with inflows sufficient to finance the deficit on the current account.

- There have been positive reports locally and abroad that the property market is beginning to move.

- A number of market commentators have reported significant economic recovery in a number of South African provinces.

Against this, said Falconer, are a few negatives.

The toxic debts behind the subprime crisis have yet to work their way through the system, so a number of economic commentators have predicted what is known as a "U-shaped bounce", where the recovery is short-lived as the economic fundamentals have not changed.

"However, whatever the individual indicators, we are confident the worst of the property market is over," said Falconer.

"If you continue to be uncertain or concerned, you could be missing out. It's time to get back into the market."

I-Net Bridge

100 reasons to smile

Thu, 28 May 2009 16:18

The Monetary Policy Committee of the SA Reserve Bank (SARB) has cut the repo rate by 100 basis points, Governor Tito Mboweni said on Thursday.

The repo rate now stands at 7.5 percent while prime has been reduced to 11 percent.

This is the SARB's fourth rate cut this year.

Mboweni said the SARB's most recent consumer price inflation forecast showed a relatively unchanged outcome for the near-term as compared to that presented to the previous meeting of the MPC.

"Over the longer term, there appears to be a moderate improvement," he added.

This forecast, Mboweni noted, was similar to the Reuters consensus forecast of private analysts who expected inflation to average 6.9 percent and 5.7 percent in 2009 and 2010 respectively.

Mboweni said the main upside risk to the inflation outlook came from cost-push pressures, in particular from electricity price increases.

"Eskom has applied to the National Energy Regulator of SA for a 34 percent interim increase in electricity tariffs, but there is still uncertainty about the final adjustment," he said.

A number of municipalities had already budgeted for significant electricity price increases in anticipation of higher Eskom tariffs, Mboweni noted.

According to the governor, in line with the less negative global outlook, there had been a moderate recovery in international oil prices.

"North Sea Brent crude oil has been trading at prices of around $60 per barrel during the past days, compared with an average of around $50 per barrel during April.

"These developments may result in a moderate increase in the domestic petrol price in June," he said.

The impact of the higher international prices on domestic petrol prices had been partly offset by exchange rate movements during the month, Mboweni said.

He added that food price inflation remained well above average inflation, and had been lagging the favourable developments at the producer price level and in the spot prices of agricultural commodities.

"Food price inflation measured 17.9 percent in August 2008 and has been moderating persistently, but slowly, since then," the governor said.

Sapa

Too early for a British Summer ??

Summer is without a doubt the most anticipated & talked about event in the British calendar. If the Poms spent half the time preparing for summer, and focus the other half on their football, then maybe they’d be able to win another World Cup…….and so relive the glory days of 1966 (was a cheapshot, I know :)

So why the big hoohah? Cos the British summer, is just so flippen short……. 

The big talking point of the last few months has been the expected reduction of interest rates. The SARB has even gone so far as to increase the number of meetings to be held in order to, and here I quote ‘To allow for more effective planning and quicker reactions to changes in the economy’. (I think to the members of the MPC, it means more buffet lunches) 

But will any kind of reduction in interest rates prove to be a British summer for the current property market? The short answer is unfortunately, no. The real dampener is the difficulty in obtaining credit from commercial banks. But this is to be expected when there’s an increase in the unemployment figure, as well as another negative growth forecast for the second quarter of the year. And with house price growth at a reported -5% year-on-year, we are still not out of the woods…….by a long shot !!

So what can be done? Popular opinion is that the SARB will cut prime interest rates to 10.5% by the end of the year. But seeing as each interest rate cut takes about 6 to 9 months, to work itself through the economy, this is not the short term answer.

Therefore, it seems as if everyone is taking a ‘Look and See’ attitude coupled with what happens domestically as well as globally.

So without further ado, get out your swimming trunks, splash on some sunscreen and hit the beach (or river), cos anything is a lot better than nothing.

www.horizon-consultancy.com

Hundreds, Bru !!

The Monetary Policy Committee of the SA Reserve Bank has cut the repo rate by 100-basis-points, Governor Tito Mboweni said on Tuesday.

The repo rate now stands at 9.5 percent while prime has been reduced to 13 percent.

"The global economy has continued to weaken significantly in recent months as a result of the turmoil in the financial markets.

"There is growing uncertainty regarding the depth and duration of the economic slowdown," Mboweni said.

He added that the South African economy had not escaped the impact of these developments, and domestic production had contracted as a result of weak domestic demand and a significant decline in export demand.

"Against this backdrop of widening domestic and global output gaps, the balance of risks to the inflation outlook has changed somewhat," he said.

Mboweni said that inflation — as measured by the reweighted and reconstituted consumer price index (CPI) for all urban areas — measured 8.1 percent in January 2009.

Food and non-alcoholic beverages prices, which increased at year-on-year rates of 15.7 percent in January, contributed 2.4 percentage points to total inflation.

The housing and utilities category contributed 2.1 percentage points, and together with food accounted for more than half of the measured inflation increase, Mboweni said.

The transport component had a minimal impact on the overall CPI as a result of the 20.3 percent reduction in petrol prices during January.

Producer price inflation, which reached 19.1 percent in August 2008, continued its downward trend, he said, measuring 9.2 percent in January 2009.

Despite the depreciation of the rand during 2008, producer prices of imported goods declined at a year-on-year rate of five percent in January.

Turning to the inflation outlook, Mboweni said the most recent central forecast of the Reserve Bank showed a near-term deterioration in the inflation outlook but a more favourable trend was forecast for the medium term, which was the relevant time frame for monetary policy.

Consumer price inflation was expected to average 8.1 percent in the first quarter of 2009 and then to decline to below six percent in the third quarter of the year.

As a result of technical base effects, inflation was then expected to marginally exceed the upper end of the inflation target range, before returning back to within the range in the second quarter of 2010.

It should remain there until the end of the forecast period in the fourth quarter of 2010, when it was expected to average 5.3 percent.

"The heightened levels of uncertainty and the rate of change of global developments make these forecasts subject to higher risk than is usually the case," Mboweni warned.

He said the inflation outlook had been dominated by the continued weakening of the global economy and financial markets, notwithstanding significant monetary and fiscal measures introduced by central banks and governments.

"The decline in global demand has resulted in a marked contraction in international trade," he said.

He reminded South Africans that the International Monetary Fund, which in January was forecasting global growth to average 0.5 percent in 2009, now expected the global economy to contract by up to one percent in 2009.

"Numerous industrialised and developing countries are already experiencing negative growth.

"World inflation is being restrained by declining demand and lower commodity prices which are expected to remain subdued under these conditions of negative or low growth.

"The weak global demand has been reflected in the export performance of the South African economy and domestic demand conditions had also deteriorated further," he said.

"Domestic demand conditions are expected to remain under pressure as a result of declining disposable incomes, tighter credit conditions and negative wealth effects."

Mboweni said the upside risks to the inflation outlook emanated primarily from cost-push pressures, particularly from administered prices.

"These include possible higher-than-expected electricity tariff increases," he said.

The decline in inflation might also be delayed by continued high rates of increases in food prices, despite marked declines in producer price food inflation, Mboweni said.

‘For the times, they are a-changin’.........maybe

Even when you read these words above, the whiny voice of Bob Dylan pops into your head willing you to sing along even if you don’t want to. Compare this to the current property situation, the questions remain: 

Are the times for property really changing?

Or are things going to get a lot worse before they get better?

For the past 2 years, interest rates have been increased 10 times in order to curb the inflation monster. Current prime rate stands at 15.50% whilst inflation has peaked at 13.6% (a far cry from the projected 3%-6% margin set by the SARB) The Rand has devalued by 40% this year alone & our political situation leading into the 2009 elections, seems wonky at best.

But to every cloud there is a silver lining? Maybe.......

In the past few months, USA, Australia, New Zealand, the European Central Bank, Turkey and even England have cut their interest rates in order to prevent the looming global recession. So why is South Africa the odd one out?

Trevor Manual has said that the impact of the global recession still has to be absorbed into the economy, and therefore a ‘wait and see’ attitude is currently held. But with real estate agents down 50% (maybe not such a bad thing), stock market down, platinum down & business confidence down, maybe it’s time to light the fires & burn the tires !!

(As long as the Rand doesn’t weaken more to negate the expected rate decrease)

The MPC meets on 11/12 December.

Let’s hope they take a feather out of the cap of the Springboks victory against England, by defying the odds & putting the market on course for a recovery leading into 2009.

Please Uncle Tito, how about an early rate cut to get us into the Christmas spirit........