As yet, there has been little recovery within the housing market in 2011, with a decline in house price growth in real terms.
According to First National Bank, if one adjusts the average house price index with the Consumer Price Index, the April real house price growth rate remained negative to the tune of -2.4%, (CPI 4.2%).
Looking forward, if the residential market cannot achieve substantial house price growth after such a huge interest rate stimulus, a period of house price decline would be the likely outcome of a possible phase of interest rate hiking, or of slowing economic growth, or both.
06 June 2011
Auction Alliance: It's Not Going To Get Better
From Auction Alliances May 2011 Newsletter:
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19 comments:
Kind of refreshing that AA is so honest about the outlook, then again their business in residential has always been about the "you're doomed, better use AA"
It's going to get MUCH worse when interest rates start rising. And rise they will... soon.
High interest rates mean lower selling prices, it's not rocket science.
And to add to that, this from PropertyWire:
Ireland, South Africa, the US and Spain have seen the largest increase in distressed property listings in the first three months of the year, according to the latest index from the Royal Institution of Chartered Surveyors.
Anon,
The deputy governor of the SARB recently made a statement that the very mechanism that reserve banks use to combat inflation i.e interest rate increases, threaten to attract short term money inflows into the country, or carry trade, resulting in a stronger rand.
Now the SARB has spent billions trying to weaken the rand. Read this about sterilizing capital inflows
Secondly all the inflation factors are cost push and not demand pull i.e they are exogenous factors unaffected by our interest rate increases. The SARB is only concerned about second round factors i.e wage increases due to rising prices etc which in turn may then affect demand pull.
Now in the article I posted above there is a reported increase in distressed sales in SA. This is consistent with me seeing demand being as depressed, if not more so than in '09 and '10, contrary to the MSM's "management of perspective economics" view.
Personally I think interest rate increases will start in Q412 in the West. This will most likely be due to the realization that zero interest rate policy has only resulted in capital flight from their countries! This was Japans issue which has fueled the yen carry trade for decades and their continued asset price deflation.
If the West increases interest rates this will weaken the rand/commodities which is what the SARB wants actually. I see EU/US debt issues and a China slowdown as a more pressing issue and this means low interest rates here anyway.
In short I dont see any interest rate increases on the horizon; contrarian view certainly but perhaps you can fault the analysis?
@ Goldilocks
Interesting view. I am by no means an Economist but if one looks at a historical graph of our inflation versus the Repo rate, they have both had very similar shapes.
Maybe views have changed significantly at the Reserve to deviate away from the methods used in the past. I don't know.
I like to take simplistic views of things and usually the best predictor of future behaviour is past behaviour. I think if inflation started to skyrocket (and here I mean published inflation - we all know real inflation has been much higher), the Reserve would tick up the Repo rate.
Anon,
The SARB is powerless in stopping cost push inflation from exogenous factors and they know it.
As I posted a few weeks back; how do SA interest rates affect oil price increases due to market speculation and unrest in MENA? How do SA interest rates affect food pricing set by international markets? How do SA interest rates affect Eskom pricing? They dont, so its pointless raising rates because you cant control cost push inflation through interest rates. You can only control demand pull inflation by curtailing money supply growth via interest rates.
Lastly views havent changed but times have. The growth of OTC derivatives and deregulation, peak oil, sovereign debt, dollar reserve timeline, internet [industrial] revolution, climate change to name a few.
Let me sum up a little here.
Increasing interest rates will:
1 - Result in more capital inflows thus strengthening the rand even more and depressing exports.
2 - Depress an already depressed economy increasing unemployment etc.
3 - Increase repossessions of vehicles and houses [which are already increasing again all on their own]putting pressure on an already pressurized banking sector.
Now what the SARB/Gov has been doing:
1 - Spending money sterilizing capital inflows and trying to weaken the rand.
2 - Increasing government debt to stimulate the economy through infrastructure spending etc.
The SARB is not that stupid to undo all they have been doing [at great expense] by trying to contain uncontainable cost push inflation. Their only concern about the present inflation is second round effects such as wage increases which may in turn lead to some demand pull inflation.
Well it sounds like good news for people in debt if rates don't increase. What does this mean for house prices though?
More stagnant nominal prices but slow real depreciation over many years? Doesn't exactly help all us have-nots waiting in the wings for bargains overnight does it?
Last Anon, I think stagnant prices and inflation erosion is the only real scenario over the next few years. But don't despair: even if prices have stayed virtually unchaged from the 2007 peak, they're still about 25% lower in real terms thanks to inflation: one million 2011 Rands will only buy you about 725,000 2007 Rands.
Adam says:
I think it is possible that rates might stay steady until the end of 2012, even
If inflation breaches the 3-6% target range.
In the UK inflation of 4% is double the target range of 2% and they still have rock-bottom rates.
But one thing is certain that if they start hiking rates in September, like I think they will, then property prices will reduce significantly.
I'm not convinced by the theory that increased rates will pop the bubble. Often when prices drop, rents rise (smaller pool of houses being let, greater demand for rental). In a city like Cape Town, where there is already a pitifully small pool of good rental property available, that will make buy-to-let a more desirable investment, which in turn will create competition in the market, which in turn will prevent prices falling to where they "need" to be.
Hello all - double dip is hitting US property as we speak.
When is it our turn ?
Why does the US always have to go one step further? Double dip? We're still waiting for the first dip!
So this US double dip is going to strengthen the Rand which in turn will cost us billions via something called "sterlizing capital inflows" to weaken it agsain. But interest rates won't rise as has been argued above.
Lovely, so we can expect nothing much to happen as per usual.
Goldilocks said:
Increasing interest rates will:
1 - Result in more capital inflows thus strengthening the rand even more and depressing exports.
2 - Depress an already depressed economy increasing unemployment etc.
3 - Increase repossessions of vehicles and houses [which are already increasing again all on their own]putting pressure on an already pressurized banking sector.
I have some questions:
1. Doesn't a stronger Rand mean imports are cheaper as well? Don't we import a lot of goods these days, even certain foods? A strong Rand is not all bad news.
2. Can't argue with this.
3. This is probably my biggest bugbear with the Reserve. Exactly who is being protected here? Yes, the people who bought property at hugely inflated prices and overextended themselves with fancy cars and credit. Why should the next generation of potential buyers be priced out of the market by foolhardy consumers? In essence aren't these people being subsidised indirectly by the Reserve keeping interest rates low? Wouldn't it be more free market to punish the people who made the bad decisions and let prices drop to their correct levels? Not everyone is going to lose their home if interest rates increase, just people who bought at the top of the market.
Anons,
The US is a very different market. For one you can walk away from your debt; the bank just gets the house. This is unlike SA or Oz etc where the bank will come after you for the remaining debt as well. This Gov/SARB sanctioned extortion is one big reason why our housing market is so resilient.
Bill,
You are correct on #1. Now can you imagine if the rand had not strengthened how much we would be paying for fuel and imported food? We import more than half our wheat now just for one. [SA's food security has declined dramatically since '94 due to the ANC land policies]
There is no free market in SA, just the usual big corpgovernment with socialist/marxist policies you find in the ROW including the West.
However sovereign debt is not the place to be investing over the next 40 years btw. Why do you think there is a bull market in gold for the last decade?
As Martin Armstrong says:
"Gold is the hedge against the mismanagement of the state"
I forgot to mention a factor on interest rate increases. Raising interest rates means paying more interest on our external debt; money that must come from existing GDP.
2 more articles:
Property owners trapped by bonds
Property prices continue to fall
Has anyone else noticed that the mood has begun to shift? Reality is beginning to set in and once the downturn becomes undeniable in the MSM it will be self reinforcing.
Sovereign debt will be the single biggest issue for the rest of the decade. This will have major knock on effects for our economy. Rent until 2015 and then take stock; everyone needs to be bearish for there to be a bottom.
Personally I feel that in this day and age, a market such as property (or anything) is directly proportional not to what people can afford, but on the quantity of credit they can obtain.
It's a sick cycle of Generation X and Y mainly renting their lifestyles from the bank. This has resulted in inflation causing items, such as cars and property, to become unreachable without credit. People throw around words like "Boom", "Bust", "Bubble" and "Recession" as if they are a by-product of trade and business, but technically the nature of any market these days is controlled by the bank, and how much they are willing to lend.
By this theory, the bank controls whether we are in recession or not. The bank controls the property market. And the bank controls the middle class' lifestyle and their level of equity. They say the economy is "recovering", including SA property, odd how that corresponds perfectly with the banks easing their lending criteria.
The banks watch the middle class. They are the cash cows. In my humble opinion, the banks (yes, including the SARB) are concerned with ensuring that they excrete the maximum amount of interest they can from the middle class salaries, and at the same time keep key markets buoyant (especially property as that's the big ticket item), and finally ensure inflation is in check.
If we see a rate increase later this year, it will be to curb inflation even though it's cost-push. Technically it the banks way of balancing their books and keeping shareholders happy at the expense of the middle class' lifestyle.
Lending requires the loan principle and interest to be repaid through enhanced production. Return on investment...growth.
At some point due to expectations of higher living standards and greater return on investment, credit/debt growth outstrips production. Then lending purely for consumption or for unproductive assets like houses keeps the game going.
At some point there is too much debt and not enough production to create the required cash flows to repay the interest or principal. Default ensues and no more borrowers can be found. Correction or collapse and we start over. This can take decades to play out and has many permutations.
The exponential growth of credit can look like economic expansion/greater productivity but like everything it has limits. This is what happens in a debt based system.
That was for anon above.
So yes it is the banking system central + private together. But it is also the politicians who promise more and more freebies to the nation in exchange for voting them in and attaining oodles of power/money.
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