The FNB Property Barometer of 1 February 2017 is a real bundle of joy. It starts, “2017 starts on a very weak note with the FNB House Price Index narrowly avoiding year-on-year deflation.” It continues to report that “the FNB HPI for January 2017 rose by a mere 0.3% year-on-year having already been in month-by-month seasonally adjusted decline for the past 6 months.” And for the final nail, “in real terms…….. the index recorded a year-on –year decline in December 2016 of -5.4%.”
You know, you can’t talk bad news up but the benefit of only having to report the facts is that you just need to state them. For those of us with jobs in Sales and businesses employing tens of people, bad news needs to be the spur for success. It’s so important that I need you to read this again: “for those of us with jobs in Sales and businesses employing tens of people, bad news needs to be the spur for success.”
In that spirit I write this blog.
The House Price Index [HPI] is a measure of the periodic increase of house prices over time. Different banks measure the prices differently, but all give very similar results at the margin. Normal measurement is year-on-year and that, including inflation and excluding inflation. The bottomline is that inflation erodes value so a 10% HPI increase with a 12% inflation means we’re going back at -2%. The HPI is more than a measure of simple house prices and the economists are quick to explain that slow house price growth is symbolic of economic pressure. Given who is buying and selling houses, the main indicators would be employment and interest rates with the huge cloud of Confidence overarching anything the consumer does long-term with their money. You may take your family for a breakfast even if your job is feeling insecure but you sure wouldn’t move to a new house under a similar cloud. Into the facts of employment and rates, we factor in such issues as impending downgrades, shenanigans in parliament, negative news reports and such lousy extraneous factors as drought and low commodity prices. So HPI measures so much more than just a price increase as we read the numbers.
Beginning with drought and commodity prices, let me make a few encouraging points:
- The drought has practically been broken in central South Africa. Having the dams full should not be underestimated even though certain parts of the country may not have had all the rain they need. In addition, the crop is only about 3% up on last year because many farmers delayed planting or lost plants before the rains came. So full dams may not warrant massive relief but, as I so often use the term, if I was offered full dams in June last year, I would have taken it! Of a truth, though I sound a little blasé about the rains, I believe their coming is a miracle. So let’s assume the farmers have more maize, therefore we import less and that they have more food to sell so prices come down as everybody is now waiting to happen; what a great place to be in comparison. That’s good news!
- Commodity prices have risen. Yes, Donald Trump was a catalyst but I would imagine that global stockpiles were depleting and the China crash of last year has somewhat normalised. If you had shares in Kumba or even Harmony Gold, you have become rich in the last 6 months. Huge increases have occurred. The other commodity that affects us not as exporters but rather than importers, is Oil. In 2015, Clem Suntner was concerned about Oil going below $30 and causing huge societal casualties in oil-producing countries. Speculation aside, I put to you that it is not charity that has caused the price to rise but rather a control (though it has proven very difficult in the cartel) of supplies coupled with an expectation of improved economic activity in developed countries. So commodities have improved and for SA that is really good news.
- The 1%+ growth rate recently posited in the Budget speech was trashed in a recent article I read. The gist of the argument is that Treasury has undershot their growth projections on a number of occasions. All I have to say is that both ABSA and Standard also projected 1%+ in their forecasts. Therefore, added to the good news above, I am fairly confident we will see better growth this year. FNB in the Property Barometer, indicate that this year could be a year of two halves in the sense that the HPI also picks up towards the end of the year. The point for me is that we’re coming off a base of 0.3-0.4%. Surely this travesty is beatable this year? The downside remains a downgrade and any negativity that comes out of the looming cabinet reshuffle. On both these counts, you and I need to “accept the things we cannot change”.
- The DOW continues to soar and is being talked up in the States. Today’s speeches by Trump may stymie that a little as he stumbles on his tax and healthcare promises’ timing, but, it does seem, America is in for a good growth spurt. That’s exciting and let’s hope Warren Buffet et al are right.
- I make the point again, I worry more about tightening credit than I do about flat house prices. By that I mean that of house prices move to such an extent that affordability and value come into play, bankers may tighten credit approvals. Flat house prices and level interest rates coupled with reasonable increases in salaries, mean that affordability ratios improve. So the current market may not be the best scenario for sellers, but buyers will be better able to afford their bonds. That’s great for sellers, buyers and anyone with an ad valorem commission riding on the transaction.
- I sat in a board meeting today and a large listed company’s economist made this statement in their Funding report: “It is anticipated that the interest rate cycle has peaked and that the SARB may begin to cut rates this year.” From their mouths to SARB’s ears! I have made the point before that rates have been well-managed but have been rising at a time SA Inc can ill-afford it. I believe that whilst there has been an imminent threat of inflationary pressures [food, fuel, weakened Rand], the SARB has been ahead of the curve, in particular the USA curve, of raising rates. This confirmation from a highly regarded Economics unit is very well received. I also think that the Elective year will be agood year for a rate reduction/s to occur. Though not common for the ANC-led government, it would do nobody any harm politically and would certainly appeal to the hard-done-by middle class. Watch this space, is all I’ll say.
- Finally, the Rand must be dumbfounding the economic fraternity. R12.90/US$ is a really good number when you consider where we have been and how we felt about it at the time. As I write. It sits at R12.99. This offsets the Oil price increase and the cost of many other imports. Sadly, Mr Gordhan has used the respite to attach more taxes to the pump price of fuel. But as for the beloved Rand, good on ‘ya!
It’s good to have some positivity to hang on to. Not conjured up, just a statement of facts; sometimes re-positioned but certainly quite feasible. As usual, so much depends on leadership and this country’s political and social leaders have much for which to be accountable. The SOE’s, PRASSA, SASSA etc must not be allowed to cock it up – wasn’t it good to see PRASSA governance kick in and dismiss the acting-CEO immediately?
So take heart. All is not lost and rising house prices may well be lagging the curve of economic improvement. In the final analysis, whether you read this or believe this blog, your energy, optimism and sheer hard work has got you this far and will take you through. Nothing changes that rule for successful people. As the quote by Leonardo da Vinci goes:
It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things.
Yours in Property.
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