ABSA: House Prices Growth Lagging Behind Inflation

Houses hurting as inflation outpaces property prices

House prices are not growing in line with inflation, according to Absa's latest property price indices released on Monday.

"The average real price [at constant 2008 prices] of houses in the middle-segment of the market was in September this year about 13% below its peak of mid-2007," Absa Home Loans property analyst Jacques du Toit said in a statement.

"This was the result of average nominal house price growth being below the average headline consumer price inflation rate during this period."

In nominal growth, the effects of inflation are not taken into account, while real prices factor in the effect of inflation.

CPIX Continues To Climb

Surprise! CPIX is continuing to climb despite every bank economist telling us that the inflationary peak had been reached.

Consumer inflation seen accelerating

The consumer price index excluding interest rates on mortgage bonds (CPIX) should accelerate in year-on-year terms to 13,3% in August from 13% in July, RMB financial markets research said on Monday.

RMB forecast a month-on-month increase of 0,5% in August CPIX.

"The upward pressure on the index will probably come from higher processed food prices and residual increases in electricity tariffs and housing costs," RMB said.

Tito: Inflation Targeting Is Here To Stay

Tito sticks to his guns

South Africa was better off with using inflation targeting as an instrument of monetary policy, the governor of the SA Reserve Bank (SARB) said on Tuesday.

"Let's stick to it for now," he told a gathering of Wits students.

He said while there were those who argued that alternative instruments could be used to fight inflation, these instruments - such as forcing banks to increase their reserves - weren't useful.

Mboweni said that lately, there had been calls to abandon inflation targeting.

"But that's because rates are high - when rates were low, no one called for inflation targeting to be shelved."

Expect A Rate Hike In August

Credit uptick boosts case for rate hike

GROWTH in demand for credit by the private sector quickened in the year to June, data showed today, undermining the case for interest rates to be left on hold next month.

The Reserve Bank has increased rates by a total of 500 basis points since June 2006, partly to curb credit-driven consumer demand that was adding to inflationary pressure.

Open Thread: Inflation

What do you think inflation will peak at? Some economists believe it will go as high as 13%. Do you think the Reserve Bank will be able to bring it under control? What other measures besides inflation targeting could be used?

Producer Price Inflation Hits 16.4%

Well that break didn't last long did it? Anyway it seems that producer price inflation just hit 16.4% which was way outside of any economists predictions. Another rate hike (or two) are a lock in.

And this is the last post till 25th July... Promise.

Producer Inflation Worsens To 12.4%

Producer Price Inflation (PPI) has worsened to 12.4%. It was expected to be 11.7%.

Producer price inflation (PPI) rose to 12.4 percent year on year in April, from March’s 11.9 percent rise according to Statistics South Africa.

The PPI rose 2.1% on a monthly basis after March’s monthly increase of 2.0%.

PPI was expected to be at 11.7% year-on-year, a survey by I-Net Bridge has found. Forecasts ranged widely from 11.0% year-on-year to 13.1% year-on-year.

Tito's looking at that big red button again...

CPIX Continues To Climb

Consumer price inflation continues to climb. Business Day reports:

THE INCREASE in SA’s consumer price index excluding mortgage rate changes (CPIX) for metro and other areas, which is used by the South African Reserve Bank (SARB) for its inflation target, was up 10,4% year-on-year (y/y) in April from 10,1% y/y in March, Statistics South Africa (Stats SA) said today.
CPIX was up 1,6% month-on-month (m/m) after it increased 1.6% m/m in March. This is the thirteenth month running that CPIX has been above the 6% upper target limit.

Headline consumer prices - the 12-month rate of change in the consumer price index (CPI) for metropolitan areas - was up 11,1% y/y in April from a 10,6% y/y increase in March.

The core inflation rate, which excludes volatile foods, municipal rates and monetary policy changes, was up 10,2% y/y in April from 9,8% y/y in March.

A 50 base point rate hike is guaranteed now and the odds for further hikes after that are rising

Emergency Rate Hike On The Way!

Consumer Price Inflation Index numbers are going to be released next week and the growing concensus seems to be it's going to be pretty bad. Bad enough for an emergency rate hike:

Chief economist of Dynamic Wealth, professor Chris Harmse, says he will not be surprised if an emergency Monetary Policy Committee (MPC) meeting is called on Wednesday afternoon next week after CPIX inflation has been announced at worse-than-expected levels.

April CPI data is due for release at 11:30 on Wednesday and comes hot on the heels of a statement made recently by central bank governor Tito Mboweni that rates should go up again.

Prior to that talk it was inferred from an SABC interview with Mboweni that an emergency meeting may be on the cards as inflation was getting out of control.

The Real Cost Of Credit

The following is a guest post from reader BP

The Real Cost Of Credit

The real cost of credit needs to take into account earnings notably the after tax or disposable income. Interest rates are one thing - the level of indebtness is another! Current levels of debt to disposable income are about 80% - it used to be about 52% until about 3 years ago when it suddenly took off. Such easy credit fueled the property run. Property was never "cheap" in the first place - easy credit pushed it to dizzying heights. At the same time from mid-2003, we had an equity bull market. By all means the residential property market outpaced it - in cape town it did. Where would that be a normal occurence? It is an incredible exception - not to be repeated for a very long time.

As interest rates respond to inflation that is grinding down peoples spending power and hurting the poor, people are crying about high interest rates. Did they never conceive that interest rates could increase from multi-decade lows? Or was it different this time - as told by the knowledgeable estate agents! And inflation will rise further as will prime. bets are on for a definite 50 points next month and a 60% chance of another 50 points in August! Prime at 16%. Not too high?

Consider the following 2 useful indicators:

1) The cost of debt-servicing as a percentage of Income. Current debt to disposable income is 80% and interest rates are 15% (15.55 next month). that means that the real cost of servicing is the product of these 2 or 12% (12.4% next month). Not too high? Consider the crisis of 1998 - debt to disposable income was 52% and prime hit 25.5% making the cost of servicing 13.26%. sure it only stayed there for a short time but it did d damage. We are currently not too far off that now. Prime at 16.5% equates to this punitive figure (16.5% * 80% approximates 25.5% *52%). BUT even so it is not only the level that counts but how high it stays up there! In effect, looking at a graph, it is not the curve that is important but the area under it (the integration of the curve for the mathematically minded). And with inflation set to rise further bet on it staying up there longer.

2) The penalty for borrowing money is actually the real cost of a loan, simply the difference between inflation and the prime rate. Currently it is 4.4% (15% - 10.6%) which by historical standards is really low - the average over the last 15 years is about 7%. so another 1.5% - 2% increase in prime is not impossible to equate to the average.

These two indicators indicate one thing: interest rates will increase in the near term and will rise further before they can be considered as "punitive".

A last comment on inflation. With commodity prices staying high (as per the CRB index of overall commodities), inflation has to feed through. It has already started in food and fuel. Wait for cars, clothing, furniture, and so on. and even though the economy stagnates, if inflation is rising the Reserve Bank HAS to raise rates. In the past, this is what Central banks have done. Such "stagflation" (economic stagnation and inflation rising) portent very hard times. Remember the "sour 70's" where a series of crises and market reversals ruined fixed asset values. They can easily arise again. My view is that they are which is why all my money is in cash products.

Reserve Bank: Inflations Going To Get Worse - Prepare For More Rate Hikes

SARB: Inflation outlook deteriorates

The South African Reserve Bank said on Tuesday inflation was expected to rise, but that it remained committed to bringing the gauge within target range "over a reasonable time horizon".

The targeted CPIX consumer inflation gauge has persisted above the top end of a 3% to 6% range since April 2007, and accelerated to a new five-year high of 10,1% year-on-year in March.

"The inflation outlook has deteriorated since the publication of the previous monetary policy review in November 2007," the central bank said in a twice-yearly monetary policy review.

More Rate Hikes To Come

Rate hikes: Expect more

After what we heard today, I am still expecting another rate hike in June or August, given the way Mboweni was talking how the Bank has reacted to the electricity price increases, and how we can see inflation into double digits.

I won't be surprised to see another hike in June.

Bond Rates: Which Way Are They Headed?

Here is a graph of the offered bond rates from First National Bank from 1986 to the end of 2007 (source)

So with the US heading into recession, inflation rates locally heading to record levels and the property market hitting a wall which way do you expect rates to go?

Edit: I changed the graph type to a step graph which is more suitable for interest rates.

Inflation: It's Not Looking Good

Consumer price inflation just pierced the 9% barrier (to 9.4% up from 8.8% in January!). With the tarriff increases that Eskom wants we can expect double digits before the end of the year. The Reserve Bank is not going to have much choice, I expect a rate hike in April with possibly more on the way.

Consumer Price Inflation Rises Again

The Consumer Price Inflation Index (CPIX) jumped again this quarter to 8.8% from January last year. The dreams of there being any rate cuts in 2008 are rapidly disappearing.