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Some hopeful signs of life

28-09-2012

For now, some life support for the ailing house market comes in the form of an apparent return to life of the mortgage market and a few other factors.

After contracting for more than a year, the value of new mortgage loans granted for residential dwellings and flats, showed growth of about 7% in June 2012. The seeming recovery might be explained by low and steady interest rates, but also by the continued decent but unsustainable growth in disposable incomes. Despite cooling somewhat, the disposable incomes of households still managed to show fairly impressive growth of 9% in the second quarter of 2012. This comes after having grown by 12% in the previous quarter.

Depending on the house-price index you choose to look at, yearly growth in national nominal house prices for August 2012 ranged from no growth (according to Absa) to growth of just below 7% (according to FNB). On the positive side, the surprise July 2012 cut in interest rates might still filter through to the house market, not to mention the possible impact of  QE “Infinite” which will continually release waves of liquidity into the world economy, and which is bound to benefit asset prices (as we have already seen in the financial markets). As they say in the classics, the politicians keep on kicking that can down the street, without daring to pick it up.

Regarding the likely movement of interest rates, the Reserve Bank is caught between a weak macro economy and the possibility of upward pressure on inflation from higher fuel and food prices. Another headache for the Reserve Bank must be the widening current account deficit and the risk that it poses to the rand exchange rate, and consequently to inflation. Fortuitously, some support for the foreign exchange value of the rand has come from strong portfolio inflows into the local debt market. This has come about through South Africa's inclusion in the Citibank World Government Bond Index (WGBI) in October 2012.   Hopefully, the Reserve Bank is in not too much of a hurry to cut interest rates further, considering that the country is hovering on negative real interest rates. Do we really want to make capital cheap in a country that has an oversupply of labour?

For more information, please contact John Lottering on 021 946 2480.