Home Buyers to spend HALF of take-home pay on their Mortgage

Economists said there is ‘no doubt’ that Bank of England interest rates will return to around 5 per cent - possibly even higher - from their current historic low of just 0.5 per cent.

If the current profit margins are maintained, it means mortgage rates will be pushed up to 8 per cent, according to Capital Economics.

It would see mortgage payments at the start of a new mortgage increase from 34 per cent of average take-home pay to 51 per cent for those buying a new home, it said.

It equates to more than £12,000 being spend on their annual mortgage repayments, as the figures are based on average take-pay home of £23,800 - or a gross salary of £31,500.

For existing borrowers – including those remortgaging – it will reach a record 42 per cent or £10,000.

Paul Diggle, an economist at Capital Economics, said: “The record level of outstanding mortgage debt relative to earnings suggests that existing mortgage borrowers would fare even worse relative to historical norms.

“And with the share of outstanding mortgages on variable rates of interest the highest in at least a decade, there is good reason to think that a sustained tightening in monetary policy would be passed on to borrowers quickly and in full.

“Were average mortgage interest rates for existing borrowers to reach 8 per cent, their average mortgage payments would rise to an all-time high of 42 per cent of take-home pay.

“Yet the additional interest rate risk that variable rates expose borrowers to can be overstated. The fact that most fixed rate periods in the UK are just two or three years long means that even most borrowers on fixed rates are exposed to a high degree of interest rate risk.”

However, he added the Bank Rate is likely to remain at its current level during this year and next.

“If that happens, it would no doubt add to the pressures on mortgage borrowers, but the house price correction that we expect over the coming years will be driven largely by the deteriorating labour market and the sheer unaffordability of housing,” he said.

It comes amid a rise in the number of people being evicted from their homes as lenders warn they will not be as tolerant about borrowers failing to keep up with their mortgage payments.

Earlier this month, the Council of Mortgage Lenders said 9,100 people had their homes repossessed during the first three months of 2011, up from 7,900 during the last three months of last year.

During the recession, lenders were told by the Government to use repossession only as last resort. But as the Government’s austerity measures take hold amid possible rises in interest rates, more home owners are expected to fail behind in their loan repayments.

Where are we in the Property Cycle?

As 2011 kicks off Adrian Goslett, CEO of RE/MAX of Southern Africa, takes a look at where South Africa’s property market is in the property cycle and what this means for homebuyers and sellers…

Cycles, a well-known phenomena in the world of economics, are evident in all economic sectors including the property market. These cycles are predictable long-term patterns that can be divided into three distinct stages known as boom, slump and recovery.

"The cycles are predictable in that booms are followed by slumps and then by a market recovery, which gives rise to the next boom as the cycle continues. The stages in the cycle are driven by various factors that affect the supply and demand equation in a particular market. In the property market, for example, supply and demand are driven by factors such as the interest rates, consumer debt-to-income ratios, the affordability of property and consumer confidence, among others," explains Goslett.

However, while predictable, these cycles are rarely regular, since the length and depth or intensity of each stage within each cycle are influenced by the particular confluence of driving factors and their effect on supply and demand.

The current property market cycle in South Africa provides a very clear example of how various factors determine the cycles.

"We experienced an unusually intense boom in the mid-2000s, with demand driven by a rapidly growing middle class with access to easy credit at low interest rates during a time of exceptional economic growth in South Africa. Property price inflation reached a peak of almost 25 percent, property sales were brisk and property development was robust. But in 2006 an unusually intense slump driven by an unusual confluence of factors emerged. Interest rates rose sharply, the implementation of the National Credit Act constrained lending and inflation soared as we entered a global and local recession, which negatively affected consumer confidence," notes Goslett.

As a result of the confluence of all these driving factors it became increasingly difficult for homebuyers to obtain credit and homeowners faced severe financial difficulties in meeting their financial obligations. Many of these overstretched homeowners tried to sell their properties and this, combined with the robust property development during the boom, created an oversupply of properties in certain sections of the market.

"This, coupled with the decline in demand driven by tight credit and affordability issues, saw the market enter a slump in which sales activity, house price inflation and new development slowed," explains Goslett.

However, recovery after a slump is inevitable.

"We have already seen the interest rates drop to historic lows, which, along with inflation back within target range, have also boosted general economic recovery. Lower interest rates, improved general economic conditions and the correction in house prices to more realistic levels have all led to an improvement in affordability. Sales activity is increasing as the banks slowly and cautiously start lending again, evidenced by improved approval rates of home loan applications. The supply and demand equation is beginning to balance again as the constraints on demand are lifted and already a shortage of properties is evident in certain areas. Given these realities, the South African property market appears to be firmly in the recovery phase of the cycle," comments Goslett

What does the property cycle mean to homeowners and potential homebuyers?

It is widely believed that the property cycle is a tool for "timing" an investment in property.

"That said, buying at the height of a boom and selling during a slump can result in a disappointing return on investment," says Goslett. He adds that the real fundamental lesson from the property cycle is that property is a long-term investment. "Excellent property returns are often only achievable if the property is held for at least a full property cycle, which generally stretches over seven to 10 years in South Africa," he says.

He says that while we are in for what may well be a long and steady recovery phase, property investors and homeowners can take comfort in the knowledge that the slump seems to have passed.

"Hence, we can expect a boom to follow. Although the boom is unlikely to be as intense as that of the early-2000s, it is sure to follow and will reveal to those who have held onto their properties during the recent and exceptionally tough slump phase that an investment in property remains one of the best long-term investments anyone can make," concludes Goslett.

Reserve Bank cuts again, but will it matter?

Last week, Reserve Bank governor Gill Marcus announced yet another rate cut, bringing the repo rate down to 5।5% and prime down to just 9% - the lowest rate the country has seen since 1974.

The move was not unexpected. Inflation has been close to or within the 3-6% target range for about a year (see chart) and has for several months surprised on the downside, while growth remains somewhat feeble, as illustrated by recent weak manufacturing data. In addition, the rand continues to display Schwarzenegger-like strength against the dollar (see chart), and, as Ireland teeters on the verge of a debt meltdown, the global economy looks more and more risky.

Against this backdrop, then, the decision to cut rates was not a surprise। It is an open question, however, whether or not the cut will have the kind of beneficial economic effects that many hope for.

In general, rate cuts tend to have two stimulating effects on the economy. First, they encourage households and businesses to borrow (and hopefully spend and invest) more, and second, they tend to weaken the currency and thus to stimulate exports. But will either of these things come to pass in South Africa, given the current context? Let's look at each in turn.

It's highly questionable whether the latest rate cut will have much effect on consumer or business borrowing.

On the consumer side, people just don't have much capacity to borrow. As the FNB Property Barometer noted last week, "The most recent Reserve Bank Quarterly Bulletin indicates that household levels of indebtedness remain stubbornly high, with the debt-to-disposable income ratio for the 2nd quarter (of 2010) at 78।2%, not far below the all-time high of 82%.

This would suggest that households as a group are not able to aggressively grow their borrowing off such a high base."

Given this, it's unlikely that the latest rate cut will boost borrowing; more likely, South Africans will try to pay down their debt as their monthly repayments decrease.

This isn't written in stone, of course। After all, last week's retail sales numbers showed that sales rose by 0.4% month-on-month in September, and 6.1% year-on-year. This growth soundly beat analysts' forecasts of around 4.7%, and suggests that South African consumers are still willing to spend.

But being willing to spend is not the same as being able to borrow and it looks like South African households are still too deep in hock to think of taking on more debt just yet। Backing up this view, last week's FNB/BER consumer confidence index reported a slight fall in the fourth quarter. Overall the index has been stuck between 14 and 15 this year, suggesting that consumers are no more upbeat now than they were at the beginning of the year, and making major new borrowing unlikely.

On the business side, there's nothing to suggest that South African businesses will borrow more at lower rates। Businesses borrow primarily when there are opportunities available for them to profitably invest in, and the current climate of uncertainty is not encouraging of such investment.

When it comes to weakening the currency, it's again not clear whether or not the rate cut will help. There's no doubt that the government is keen to see the rand weaken against the dollar; finance minister Pravin Gordhan announced measures to weaken the currency during his recent Budget speech, including further exchange control relaxation and the further accumulation of foreign exchange reserves, and economists have speculated that a general push to weaken the rand was behind last week's rate cut, although Marcus was adamant that this wasn't the case।

Either way, however, it seems very unlikely that South Africa can actually do much about the level of the rand. As Marcus noted, "Since the previous meeting of the Monetary Policy Committee [in September], the rand has appreciated by over 3% against the dollar. This has been despite lower domestic interest rates and the higher pace of reserve accumulation."

In large part the problem is that even after 650 basis points in cuts, South Africa's interest rates are still high by global standards (see table), and will doubtless continue to attract hot money (foreign money from investors looking for better yields), which will keep the currency strong।

In addition, a lot of rand/dollar volatility is actually just dollar/euro volatility in disguise, and so events in the US and Europe, which South Africa can do nothing about, are often the major drivers of the currency। Overall, then, it's unlikely that a 50 basis-point cut in domestic rates will have much effect on the rand.

What, then, can we conclude about the latest rate cut? While the reasons behind it are obvious, solid, and sensible, it remains an open question whether or not it will pay off। Given current circumstances, there seems to be no easy way for the cut to boost the economy through currency weakness or increased borrowing. Only time will tell if we can cut our way to faster growth.

Write to Felicity Duncan: felicity@moneyweb.co.za

*This article first appeared in Discovery Invest

Threats to SA's Property Market

PRETORIA - Steep increases in municipal rates, electricity and service charges will be one of the factors to watch in the property market according to Absa's senior Property Analyst Jacques du Toit. This and possible increases in interest rates were two of the potential threats to the property market in the coming months.

Du Toit recently addressed the 2010 ARELLO District 6 meeting in Sandton about the prospects of the local housing market going forward and said it was unlikely that the property market was heading for a boom, despite the recent recovery in house prices. The Association of Real Estate Licence Law Officials (ARELLO) is an international organisation and South Africa forms part of ARELLO District 6, which consists of non-American countries.

In a post-conference interview with Realestateweb, Du Toit said he expected the recovery in the housing market to be gradual and dependent on the income position of households. "Debt levels are high. There have been job losses and large scale unemployment during the course of 2009. Also in the first quarter of 2010 the latest figures from Statistics SA show that there has been another round of job losses. This has an impact on the disposable income of households and while this situation persists the property market will remain under pressure."

Unlike some analysts Du Toit doesn't believe that we are headed for a double recessionary dip, but cautions that the situation in Europe may have a macroeconomic spill-over, which will impact on South Africa. "At this stage it doesn't look like this will have a major effect on South Africa, but as far as house price growth is concerned we are expecting somewhat slower year-on-year growth in the second half of 2010."

Du Toit notes that the leisure market has been slow to recover and that the coastal market has remained sluggish because of that. This however may present opportunities for investors who are looking for "good buys".

A hike in interest rates may also become a factor in the second half of 2011. "We feel that is when inflationary pressures will start to escalate, especially due to electricity and other service hikes and government may increase interest rates in an effort to curb inflation."

We asked how big an impact he expects electricity and municipal rate hikes to have on homeowners: "I believe this is going to play an increasing role in the choices prospective homebuyers make in the future. We'll be seeing major hikes in electricity and the resulting impact on the cost of running a household. There is also the issue of increasing rates, and buyers will take this into account when deciding on a property."

YDL Investment Property CEO Anton de Leeuw agrees with Du Toit's analysis. "From an investment perspective there has been a significant drop in the buy-to-let market. Investors are worried about returns and they are worried that prices may contract even further. What we've found with our client base is that there has been a significant shift to buying distressed properties, where properties are bought at substantial discount to market value. "

De Leeuw says despite the difficult market conditions their investors are still looking at average yields of about 10%, but agrees that profits in the property market are to be made in the long haul, as quick turnaround speculative profit opportunities are becoming harder to come by.

Time for a Rate Cut ?

Thu, 06 May 2010 08:05

Difficulties getting a bond have been cited as a good reason for a further drop in interest rates but the Reserve Bank has hinted the scope for further cuts is limited.

Rawson Properties chairman Bill Rawson says in his 39 years in property, “it has seldom been more difficult to get a bond”. He says the applicant has to show that over a period of at least six months his cash flow has been able to support an outlay equal to what he would pay on his bond.
“If, for example, he has been paying R6000 a month on rent and now wants to invest R10000 a month in a home, he will have to produce very substantial evidence that he will be under no pressure to pay the extra amount.

“Impressive assets invested elsewhere will not make his application more likely to succeed: the banks look only at cash flow. They also insist on a squeaky-clean, problem-free debt-paying record, even on minor accounts such as those for retail outlets.”

Reserve Bank governor Gill Marcus said recently that interest rates were likely to stay steady “for some time”, damping speculation of another cut this month.

Marcus warned analysts not to jump to conclusions based on February’s surprise fall in retail sales, which merely confirmed “the fragile nature” of consumer spending. “The scope for further easing is limited, and the repurchase rate is likely to remain stable for some time,” she said.

Before the Bank’s last policy meeting, Rawson says, nine out of 10 economists predicted a further cut was very unlikely, but were gratified when the Bank did, in fact, cut rates. “Now, with the rate already reduced by 5,5 percentage points since December 2008 and with prime at only 10 percent, it could be argued a further cut is not needed. In my view, however, it is absolutely essential. We need it not only to help the housing market move faster, but also to boost the economy as a whole.”

Statistics SA’s January and February figures, says Rawson, show that consumer spending was down 1,5 percent and until this begins to rise there can be no significant economic upturn.
“Many emerging middle-class people are carrying far too much debt but there is a growing appreciation in some sectors that this must be reduced, especially if you hope to become a homeowner. A drop in rates will help those paying off debts, particularly those on high higher-purchase rates.”

Low interest rates, he says, will encourage people to find investments other than equities and enhance the appeal of property.

“Every now and then one reads in the press that equities have performed better than property. What these surveys do not show you is that the returns on property are usually better than those on shares for the simple reason that the majority of property buyers are bonded: their actual capital outlay is fairly small but their rents or their profits on their sales are highly satisfactory as they relate to the total value of the property.”

A further good reason for a drop in the interest rate, Rawson, says, is that, in boosting the economy, it would boost job creation. “I strongly suspect the official unemployment figures are way below the real figures. In many rural areas people are starving. In Grahamstown, I am told, more than 60 percent of employable males are jobless. All the indicators, therefore, point to the May meeting - cutting the rate by a further half point, giving us the lowest interest rate in 40 years … ” and we certainly need it at this stage in SA’s economic recovery.”

Source: Business Day

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

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

Into the Light - The State of the South African Economy

After months of denials, clever word play & sidestepping the question, Trevor Manual & Tito Mboweni have finally relented that South Africa is in a recession. So what exactly does this mean? In short, it means that we experienced negative growth for the first time in 17 years.

So why the sudden change in mood? Whatever happened to ‘We will weather the storm’ or ‘South Africa will be resilient against the credit crisis’ or ‘Our banks are world class & didn’t buy any toxic assets’. When Europe & the US are our biggest trading partners, isn’t it ignorant (or stupid if you like) to think that we won’t be affected by the fall out? (The fact that the SA economy is approximately 6-8 months behind UK is no excuse for the turnaround from our esteemed financial leaders)

The Economy – Who is steering the ship when there’s no rudder?

According the Cees Bruggemans, chief economist for FNB, the economy grew by 3% in 2008 and contracted by 1-2% in 2009. This was mainly due to the global banking and credit crisis and its impacts on SA’s mining and industrial exports. But a rebound of 2-4% should be seen by 2010.

Our inflation outlook remains positive with signs of further decline from a height of nearly 14% in 2008 to 8.5% in 2009. The expected average in 2009 is 7.5%% whilst 2010 will see it fall into the SARB’s target range of 5%. But a lot of assumptions are taken into consideration for this outlook !! Assumptions such as a global deflation during 2009, coupled with mild inflation in 2010 as well as the ‘small chance’ of oil price fluctuations. (In Summary: Let’s get out the dartboard & have a fat stab at what things might be like)

The Property Market – All pain, No gain?

The inescapable truth is that the worst and most widespread economic recession since the 1930s continues to batter the housing market not only in the UK and SA, but in markets across the globe.

According to Knight Frank, a major player in the international property market, there are a combination of factors that have contributed to the current decline in house prices. These include affordability, an increase in unemployment which in turn affects consumer confidence. With the recent 3.5% reduction in interest rates since December 08, South African banks have still decided to tighten their lending criteria ,as their outlook has changed from a national level to one of global sentiment. (So they’re actually comparing apples with pears……I hope Tito gives them all a fat klap !!)

Even with the current market perfectly suited to bargain buyers flushed with cash, the sales remain inconsistent proving that even these buyers are playing a waiting game for a clearer sign that the market has reached ground zero. The biggest problem that still remains is that houses are still highly unaffordable due to previously rapid property growth, low interest rates & high disposable incomes. In light of all that, maybe it’s not a bad thing that the tables now have turned from the heady days of rapid property growth. Otherwise, things could’ve been a lot worse than they are now.

The Upturn – What is that?

But is the doom and gloom we’re currently experiencing the start of things to come, or will an improvement be seen any time soon? (I’m hesitant to use the word recovery)

For the UK, the recession has slowed & according to Alistair Darling, Britain’s Chancellor, an improvement is expected by late 2009. He goes on to say that a 1.5% growth is expected provided that banks ease lending criteria to consumers as well as companies. (Those silly banks again !)

If you take the 6-8 months that SA lags behind, we could see an improvement by the World Cup in 2010. Coupled with the continued investment in our country’s infrastructure & the international exposure gained from hosting the biggest event on the planet (Don’t forget the projected R21 billion cash injection that will be generated by the event) I therefore think it safe to say that the economy will be due to jumpstart back into action, by middle to end 2010.

As for now, remember that any recession is part of a cycle. Even when things seem to be at its darkest possible point, the cycle will turn & take us back into the light.

Do not go gentle into that good night. Rage, rage against the dying of the light – Dylan Thomas

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

Get used to the downswing, so that the upswing won’t give you Vertigo.....

Is it just me or is the world wallowing in the global economic crises? 

Every time you switch the channel to Sky / CNN or BBC you hear of unemployment, negative growth, repossessions, etc. Are things really that bad? And are we really approaching the worst recession since the 1980’s when the international community shunned us because of our political policies? The simple answer is unfortunately…………….………yes. 

Forecasts by Economists (here come the predictions) set our GDP growth………....sorry, our GDP decline to be in the region of -10% for 2009. And as pure economists, they always leave you with a ‘silver lining’…. but this may improve to -8% toward the end of the year. (What the hell does it matter when you’re looking at negative growth !!!)

In the property market, our commercial banks continued to restrict lending. This increased the average bank decline ratio (How many mortgage applications are declined after being submitted) to 60% !! As for deposits required to secure your property, the average deposit required was 24% compared to 16% last year. (If these figures don’t make you ill, then nothing will………)

With the potential for more interest rate cuts on the way, under such dire global and domestic economic conditions, it’s unlikely that reductions will even get the residential market out of bed. Let’s hope things improve, even though I have a sneaking suspicion that it’s going to get worse before it gets better. 

In conclusion, just a few words on this month’s election: 

Remember, that in our amazing democratic country, you the voter have the right to choose. No matter what the outcome, YOUR vote has power. So whatever your decision is, make sure that it’s based on what you believe to be right, as it not only affects you, but millions of South Africans worldwide. 

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........