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Thursday, January 1, 2009
Time to buy

It’s time to take stock of the situation after something of a dismal year for the residential property market, reeling from the effects of a commodity price spike which saw oil peak near to US$150/barrel and global food prices go into orbit, comments John Loos, Property Strategist at FNB Home Loans

“This led to a major CPIX inflation surge, and a further resumption of interest rate hikes in the second quarter. Not to mention the apparent surge in emigration sales in the suburbs as sentiment seemed to take a knock from events such as Polokwane, the Eskom crisis and Zimbabwe.”
The FNB House Price Index inflation rate, decelerated for the 4th consecutive year to single-digit inflation with many areas already in price deflation, and by late 2008 the index itself had moved into deflation
Looking forward to 2009, he says there are some early signs of improvement in household sector fundamentals, with household debt-to-disposable income ratio now declining, while domestic inflation and interest rates have started heading in the right direction. “This is great news for the market, and is expected to translate into a declining household debt-service ratio (cost of servicing debt as a percentage of disposable income) through 2009.
“An expected series of interest rate cuts to 12% prime by late this year, and declining inflation supporting real disposable income growth mildly, is expected to lead to a gradual rise in residential demand as 2009 progresses,” says Loos. “The emphasis is on gradual, because against these positive drivers we have to face the negative impacts of a global economic slump on our exports and thus on our economy, which is expected to grow slower and shed more jobs for some time.”
Therefore, positive year-on-year growth in new mortgage loans is only anticipated in the second half of this year, while the return of positive year-on-year house price growth, (after an expected average deflation rate of -3.7% during 2009), is only anticipated in 2010. “The reasoning behind the lag in the response of average house prices to improving demand has to do with the belief that there is still something of an oversupply of property on the market, which would take some time to get mopped up,” he comments.

“In short, therefore, we have received a host of good news recently which has to do with an improving inflation, interest rate and household credit situation. But patience is required, as 2009 will probably still see the market battling against very weak economic growth.
As for the economy the prime rate is forecast to continue its decline through 2009, to fall by a total 350 basis points to 12% by the end of the year. Real GDP growth is forecast at 2% (down from 3.2% for 2008), but rise to 3% in 2010. The gradual recovery towards 2010 should come on the back of lower interest rates and a gradually recovering global economy.  After an impressive 6.9% real growth in real household disposable income in 2007 (although steadily declining from quarter to quarter), 2008 was forecast to yield a slower growth rate of 2.5% by year end, followed by 1.5% this year, and 5.1% in 2010.
The projection for this year is significantly worse than in previous forecasts, as it allows for what appears to be a worse- than-previously-expected job loss situation. Nevertheless, as the year progresses, real disposable income growth should gradually recover on the back of declining consumer price inflation, after a very poor start to the year. The good 2010 number will not only have the benefit of an expected improvement in job growth and lower inflation, but also lower net interest payments declining, and in an improved economic environment one should expect to see stronger growth in the “income from property (investments) component of household sector disposable income in that year.”
The debt-service ratio was believed to have peaked at 11.7% in the third quarter of 2008 (very similar to the near-12% ratios of previous big cycles in the 80s and 90s – ignoring the 1998 25.5% prime rate spike), and is expected to decline to 8% by end-2010.
For the 2008 year (with figures still to finalise), the total value of new mortgage loans and re-advances granted is projected to fall by about -25.6%, implying that from 2007’s total value of R364.6bn, new mortgage loans granted were projected at R271.3bn for 2008, then followed by another more mild rate of decline of -5.3% to R257bn for 2009. Bear in mind, though, that from quarter to quarter the 2009 situation is expected to improve steadily in response to improving real disposable income growth and lower  debt-servicing costs, and by 2010 the mortgage market is projected to be growing at a lot faster (43.4%!) to R368.5 billion.

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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