Why a recovering US property market bodes well for South Africa

The United States has long held sway over the global economy and as such its welfare has had far reaching implications for the rest of the world. Cue the sub-prime mortgage crisis in 2007 which effectively crashed the US housing market, and of which the effects are still very much in evidence, particularly in America and parts of Europe.

"Due to the US's incredible economic power we've often noticed that the local property market tends to lag between three to six months behind the American market", says Bruce Swain, MD of Leapfrog Property Group. As such local estate agents and buyers are inclined to keep an eye on developments in the US. "Of course South Africa is a different kettle of fish and one would be foolish to assume all movements in the US market will be mirrored in ours but, it does often give one an indication of what could be headed our way", says Swain.

Even earlier in 2012 many still doubted as to when the US real estate market would begin recovering. Now it would seem that revival is in sight; JP Morgan & Co and Wells Fargo & Co, the principal home lenders in the States report double-digit quarterly earnings growth last week. According to Sterne Agee, a banking analyst from Todd Hargeman as reported in the LA Times, both companies "clearly expressed a view of signs of recovery, if not stabilization".

The "Improving Markets Index" as compiled by the National Association of Home Builders and First American Title Insurance indicates that a 103 housing markets across the US now qualify to be listed, up from 76 in January 2012. Barry Rutenberg, chairman of the National Association of Home Builders (NAHB), believes that; ""This is an encouraging sign that the housing recovery is proceeding at a steady pace as firming prices and employment help spur new building activity, which in turn generates new jobs and more home sales."

Whilst improving markets are still a far cry from stable or even better, growing markets, it is the first sign that the American housing market is recovering. Broadly speaking any recovery in the States is bound to filter through to the rest of the world, which should eventually lead to rallying of exports from SA to Europe and other economic corrections. These corrections will hopefully lead to more job creation, increased earnings and ultimately, the amelioration of the local property market.

That being said, there are local factors that have a greater, and more immediate, effect on the SA industry such as the recent wild cat strikes and the tragedy that took place at Marikana, the staggering level of unemployment and the downgrading of our sovereign debt. These circumstances shake investor confidence, decreases international funding, threaten our exports and ultimately culminate in an impoverished economy.

Factors that contribute more directly to the property market include the lack of household savings, the high level of household debt-to-disposable income ratio, the increase of municipal rates and the difficulty of obtaining a home loan.

Bruce Swain believes that the South African Reserve Bank has done what it can to aid the property market by keeping the repo rate at a low 5%. According to John Loos, Household Sector and Property Strategist at FNB, the greatest problem the market now faces is the lack of household savings. At present the household debt-to-disposable income ratio stands at 76.3% (an increase over the first two quarters of 2012). Loos states that: "This savings shortage is a serious structural issue not only constraining the housing market but also many people's ability to retire financially sound."

Combined with the fact that banks' lending criteria are now considerably more stringent than four or five years ago the reality is that many potential buyers cannot amass the deposit needed to secure a loan.

Of course saving isn't the only problem. Municipal rates and tariffs have increased: Loos points out that where the average house price/average remuneration ratio fell by -24.4% since 2008, the rates and tariffs/remuneration has increased by 6.54%. Savings are less and properties are costing more to maintain – hardly a recipe for a sound property market.

That being said, the local property market is still stable, if sluggish, and there are slight indications that it's picking up. Yes, South Africans need to start saving there's no doubt but, our market didn't take the hit many of its international siblings did and with the stable repo rate and banks easing their lending criteria somewhat there is hope. Sellers are still placing their homes in the market and the buyers are there. "Remember, regardless of the current global and national economic situation, property is a long term game and the industry will correct itself in time. Patience is key during this period", advises Swain.

http://www.eprop.co.za/news/item/14455-why-a-recovering-us-property-market-bodes-well-for-sa.html

SA recovery still on track despite Global Shocks

South African consumers can find some reassurance in the fact that, despite the serious shocks seen around the globe in the first quarter of the year, the economic recovery underway in South Africa is still on track and growth prospects remain positive.

We have experienced some unexpectedly serious shocks in recent months, such as the tragic earthquake and tsunami in Japan and political strife in the Middle East and North Africa, exacerbated by rising oil and food prices, further debt bailouts in Europe and concerns over tightening fiscal and monetary policies in many countries. All of these have negative consequences for economic growth, and have combined to spark uncertainty around the consequences for the global economic recovery, and in turn on South Africa’s own recovery. on the positive side, we believe that none of these threats has so far been substantial enough to derail South Africa’s growth path this year. In fact, we have kept our GDP growth forecast for 2011 unchanged at 3.7%.

Although we have not yet seen all of the negative fallout from the economic and nuclear disaster in Japan, that country contributes only 9% of global GDP, 4.5% of world imports and 5% of world exports, making it too small to cause more than a temporary “blip” in the global economic upturn.

Although it is the world’s third largest economy, we don’t see Japan as a ‘game-changer’ for the global economy,” he observes. “Its impact is likely to be relatively limited, and in a few months’ time we should start to see a positive growth momentum generated by rebuilding there.

Meanwhile, the political strife in the Middle East and North Africa (MENA) has important implications for emerging market governments everywhere.

The countries so far hit by the unrest – like Tunisia, Egypt, Libya, Bahrain and Syria, among others – are too small to slow down the global economic rebound. However, should the turmoil spread further in the Middle East and disrupt oil supplies, serious consequences could be felt. For now, we know that poverty and inequality is rife in many emerging markets. Other emerging market governments (especially autocracies and poorly performing democracies) could learn some valuable economic policy lessons from the uprisings to date. These include:

• - Making growth, employment, poverty reduction and wealth redistribution even higher priorities;
• - Placing special emphasis on price stability and improving efficiency in government delivery;
• - Boosting food production to improve self-sufficiency; and
• - From a global perspective, ensuring fast growth is not limited to China and India.

Turning to China, the Chinese government is “very much aware” of the impact the MENA uprisings could have on its own people. So even though the rest of the world is concerned about tighter monetary policy choking off growth there, it is unlikely that the Chinese economy will experience a sharp growth slump. The policy balancing act between containing inflation and stimulating growth is a delicate one that so far the Chinese government has proved to be very good at, and this is likely to continue for the foreseeable future. We don’t see Chinese growth falling off a cliff, despite their ongoing policy tightening, although it is gradually slowing from very high levels.

Some of China’s economic slowdown is being offset by the US, where the strength of the recovery continues to surprise to the upside. For example, the March Purchasing Managers’ Index (PMI) and Leading Indicator show the manufacturing sector and wider economy continue to rebound.

All this is good news for South Africa’s growth prospects, as the global economic recovery underpins our own. The rand has stayed surprisingly strong, helping to cushion the inflationary impact of higher oil and food prices. this is due to a number of factors: still structurally strong growth in emerging markets; high commodity prices; a healthy current account balance; our relatively high interest rates; and a strong fiscal position.

I don’t expect any of these factors to change significantly any time soon, which is why the rand is likely to stay relatively strong on a trade-weighted basis in the short term. Our budget deficit for the current fiscal year is likely to come in better than expected, our interest rates remain relatively high (they may start rising from late this year or early next year), the current account could deteriorate somewhat as imports rise into the recovery, but commodity prices should stay well supported over the longer-term.

The main concern remains our lack of progress in raising our growth levels structurally, from the current 3-4% to 6-7%, closer to the other BRICS members. We are expecting 3.7% GDP growth for 2011 and 4.0% for 2012. There are several measures we believe government must focus on to improve our growth prospects: lift SA’s relative competitiveness by encouraging a more competitive and productive labour force; increase infrastructure investment; improve service delivery (especially education); preserve a business-friendly environment to encourage private sector investment and continue to focus on keeping inflation low.

*Johann Els is a senior economist at Old Mutual Investment Group SA (OMIGSA).

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

The Light at the end of the Tunnel, may be the light of an oncoming Train

Do you want the good news or bad news first?

Let’s start with the good news so as to soften the blow when it comes to telling you the bad news:

The Good News

Our April elections were judged to be free, fair & but above all, ‘incident’ free. We were praised internationally of being an example to not only Africa, but to the rest of the world as well. (Hats off to all :)

Our beloved Tito decreased the interest rates by yet another 1%, bringing the prime rate to 12%. It’s forecasted that another 1.5% will be cut before the end of the year thereby making the total decrease since December last year a whopping 3.5% !! (We want more – We want more !!)

More than 1.8 million tickets have been requested for the 2010 Soccer World Cup. Applications came from more than 200 countries with the leading countries being South Africa, USA, United Kingdom & Germany :)

The Bad News

FNB’s house price index reports that the annual property growth sits at an eye watering -7.8%. So over the period of only 1 year, you’ve lost almost 8% on the value of your house (Bring on the waterworks……… L)

Even with Tito’s gift of reducing interest rates, the consumer debt ratio still stands at 75% (So for every paycheck you get, you pay 75% to debt…..and that’s AFTER tax!!)

Economists predict a bloodbath of job losses totalling almost 300 000 by the end of the year, especially in the automotive & mining sectors (This is particularly bad as it affects our biggest exports, namely gold and platinum)

The ‘Guess’

As for my ‘calculated’ guess for when all this pain will go away, I would say the middle of next year. My reasons for this are simple:

- Sentiment on the global recession will improve due to successful ‘recession proof’ policies implemented this year, coupled with the affects of our local interest rate reductions.

- Together with the international exposure of hosting a successful World Cup, our commercial banks will slowly reduce lending criteria, thereby kick-starting the property market once again.

As for Today: Always remember, the harder the rain, the better the sunshine.