QUO VADIS? (Where are you going?)

/in /by

The extract from FNB’s Property Barometer for July 2018 below leaves me posing the subject’s question.

We started out so positively with Ramaphoria taking hold of us, our stock markets, Rating Agencies and the property market. The other day, I read an article in which this term was called Ramaphobia by mistake; it could have been a Freudian slip.

Here is the extract:

“While periodic fluctuations in economic growth could see transaction volumes growth turn positive from time to time, the consistently negative real house price growth since early-2016 leads us to believe that economic growth rates of 1%-1.5%, along with very little interest rate stimulus, are not sufficient to create the level of housing demand that can mop up oversupplies, balance the market and lead to positive real house price growth.

With 7 months’ worth of house price data available for 2018, it appears increasingly likely that average house price growth for the entire 2018 will come in slower than 2017’s 4.3%, and we now forecast an average price growth of 3.5% for this year. This is based on a GDP forecast of 1.3% for 2018, which is unchanged from 2017. The Firstrand Economics team sees slightly faster economic growth in 2019, to the tune of 1.6%, translating into a slightly faster average house price forecast of 3.7%.

Given what we have said about economic growth is insufficient to balance the housing market better, the theme through our forecast period is one of low single-digit house price growth, underperforming CPI inflation, which will translate into further real house price decline”

I cannot argue the FNB view based on current evidence and they may prove right in their forecasts. I did not have any other banks’ reports at the time of writing, but I doubt they will contradict the thoughts above.

So where did things change and what is positive at all in our current predicament? Firstly, the World Bank’s forecast of 1.7-1.9% growth in GDP was no doubt based on positive views of SA Inc. It was mirrored, though slightly muted, by the banks. Then we had real positive noises around corruption and repatriation of stolen funds. This has proved difficult. Then we had confidence that CR would be able to quickly consolidate his position and make real changes to the ANC whilst retaining unity, but this is obviously not possible and compromise rather than decisiveness has hallmarked CR’s Presidency thus far.

Are you miserable and beginning a self-prophetic downward spiral or do you remain positive against the odds? I am not Pollyannaish and I understand both views. However, just before you decide on the former, here are some initiatives that we thought we would not, or never thought we would see:

  1. The July inflation was 5.1%. That makes the HPI real growth negative; about  -1% to be more specific. But, two points on that – the price of petrol caused the inflation increase, practically, nothing else. Secondly, the SARB will not raise interest rates in such an environment and, more particularly, in the face of an election. So I believe, interest rates will not rise despite the Rand decline.
  2. The Zondo commission has kicked off to investigate State Capture. Thulii Madonsela cobbled State of Capture report together just before she left office; thank goodness! Now the commission is in place to investigate and report on the phenomenon. Be warned, the commission will only then recommend NPA intervention to investigate and prosecute offenders. We thought 6 months would be enough – trial-by-Zumaleaks, but that was never going to happen. Remember, we function under the rule of law and a Constitution. Be grateful this is not the Wild West. Should we toss that out, then anything goes. If you gave me the Zondo Commission taking two years to conclude in November 2017, I would have taken it gratefully.
  3. I saw some of my ex-Nedbank executives on Carte Blanche talking about how they were dismissed en masse at SARS. The Nugent Commission has now heard so much corroborative evidence that Tom Moyane and his management ravaged a world-class tax collection agency by reconfiguring the organization, that the Evidence-leader called for dissenting evidence – there has been none! I saw in the paper today, that Bain Consulting, who we from Nedbank know well and who were paid R200m for their opinion, consulted on the restructure. It remains to be seen whether they and KPMG gave SARS top brass the ammunition to reduce the organization to a corruption-friendly entity. We will see. Again, if you’d given me the Nugent Commission late last year, I would have jumped at it.
  4. The Investment team that CR put in place must have terrible headwinds presently, but they are brilliant individuals. Strength to their arms!
  5. SARB has challenged the new Public Protector’s report on their existence and won. In the face of the EFF’s tabling of a SARB nationalization Proposal to Parliament, they still remain completely independent. I must believe that will not change.
  6. The Minister of Energy and Minerals, Gwede Mantashe, has withdrawn the Amendment Bill to the Mining and Minerals Act. Great news and somewhat reassuring for mining investors. Remember, Zwane from Bloemfontein was a Gupterite and introduced the Bill amendment. One of the key provisions was that the Minister could direct to whom product could be sold and what beneficiation should be pursued. Who do you think would have benefited??
  7. Government is beginning to deal with Social Equity. I think their methods suck and telling me the Constitution’s clause 25 will be changed while we wait for the analysis of the 149000 submissions submitted to the provincial hearings on this matter, does nothing for my confidence, but we need to deal with this; let me say this again, we need to deal with social equity. In the meantime, Adam Catzavelos covers us in shame – what he said and posted was a disgrace. How is that we manage to take one step forward and then shoot ourselves in both feet?
  8. The CEO’s are better managed now than for the last 8 years. Can we save them all? I have no idea, but I would back Pravin to do his best.

You see, not everything is negative. Like you I’m worried and I would be lying to not admit it, but we have a number of positive things happening and we need to hang onto these. You see, whether you are positive or negative, “it” will happen, but I can guarantee you, what you do with the outcome will depend on your going-in attitude.

Yours in Property.

PROPERTY MARKET: WHERE ARE WE?

/in , /by

Okay, just before you think I have the answer to my question, here are two extracts from two leading banks as of June 2018:

Bank#1: “Therefore, the signs are increasingly pointing to an even slower average house price growth year in 2018, than in 2017, and possibly the 4th consecutive year of house price growth slow down, despite recent mild growth acceleration.”

Bank#2: “We still see 2018 house prices stronger than in 2017 due to the turnaround in business and consumer sentiment as well as gradually easing credit conditions.”

So the answer to my question is simple, “I don’t know!” OR, “Eish!”

Of course, one should be grateful for the freedom of the Press and the competition between the banks. Either, or both, would allow for such disparate views between the banks and no doubt, economic models and sentiments have been incorporated in these views.

To the latter point, B#1 has a more jaundiced view of the future than B#2. B#2 continued to say, “We are, however, slightly more cautious in the short-term but remain convinced about longer-term improvements. We maintain our view that building and purchasing activity, relatively subdued in the last year, will benefit from the upswing in business and consumer sentiment. Indeed, data already indicates signs of improvement, with year-to-date to April volumes of building plans passed rising 18.8% above their 2017 levels in the same period.”

Readers of this blog know my views on Perspective. I’m not humanist in these views, but I do contend that a positive perspective has a far better chance of positive results than a negative one. So, if there were a vote, this time I’d vote for Bank#2. In fact, really little difference exists between the banks’ reports on the House Price Index other than their statistical methodology creating slightly differing percentages. Here are the relevant extracts:

Bank#1: “On a year-on-year basis, the B#1 House Price Index’s growth rate continued to accelerate mildly in June 2018, reaching 4.1%, up from a revised 3.9% in May, and the 4th consecutive month of growth acceleration since the 2.9% low point reached in February 2018.

In real terms, however, when adjusting for CPI (Consumer Price Index) inflation, house prices remain in decline. As at May 2018 (June CPI not yet available), real house prices declined year-on-year by -0.5%, with CPI inflation at 4.4% in that month and house price growth at 3.9%.”

Bank#1 has this to say by way of explanation, “We believe this recent mild acceleration in house price growth to be the lagged impact of that brief sentiment improvement in the country early in 2018 on the back of the major political leadership changes in the country, notably a change in President. That sentiment improvement led to a noticeable 1st quarter increase in residential market activity and demand and this has arguably fed through into price growth of late.”

Bank#2: “B#2’s HPI has retreated further, to 4.4% y/y in June, from 4.9% in May (revised from 4.8% y/y), dragging year-to-date average annual growth to 4.9% – virtually flat from the annual average growth of 4.7% in 2017.” For the sake of comparison, B#2’s CPI in their report is 4.2% and this results in a 0.2% real growth in house prices for year-on-year, June 2018.

Like any good economist, B#2 preface any possible over-positivity with this comment, “Much will depend on how much sentiment translates into investment and, ultimately, higher employment levels.”

Two major banks assessing the same data and coming up with very similar results but with different outlooks.

Let’s just analyse B#1’s comment on the lag effect of good news, termed, “that brief sentiment improvement”. Essentially, CR’s election to President caused such a stir that housing activity lifted and estate agents were busier and sellers achieved their prices and banks lent buyers the money. I fully agree with B#1’s sense, though I imagine, the first quarter is generally better as we all return from leave and transfer to new job opportunities etc. This fact makes you think though, and I’ll close on a possible scenario allied to this. In the meantime, turning to B#2, their more positive perspective is that CR will, in fact, be able to lift economic output and thus sustain “Investment and, ultimately, higher employment levels.”

If I look at his successes in Saudi Arabia and $20bn being invested in Energy and Trade, and many of the other initiatives that his government has achieved, I sense that he could make a difference. And of a truth, probably nothing could be worse than the captured state we were in before his election. The issue, given the incredibly high stakes economically, is “how much better” rather than “whether better”? These points bring me to a close. To put you out of your misery, the banks are FNB and Standard, respectively. On the lighter side and to Standard’s kudos, they mention, “We expect a gradual easing of credit standards this year and next, alongside moderately improving consumer affordability matrices.” “Yes pleez!” I hear you All Cry.

Soberly though, the question posed is: Where are we? The writer’s view is simply that we are in better shape than we would have been even though the house price growth is marginal in nominal or real terms. The fact that it is anywhere near positive in real terms, is a tribute to Inflation management by the SARB’s MPC. The recent holding of the interest rate in the face of inflationary pressures from the Rand and Oil, and backed by Standard Bank’s view that “the SARB is likely to keep interest rates unchanged over the next 12 months”, is great news. But the question remains as to what would recover that sentiment that “led to a noticeable 1st quarter increase in residential market activity and demand” and cause it to be maintained?

I have no research department behind me, but I put to you the following: To sustain an encouraging level of housing activity and price rises, South Africa needs 2%-plus growth for 2 years after an initial pick-up period of 6 months. In essence, it is my view that we need Ramanomics and not just Ramaphoria to sustain a higher level of confidence and property economics. I think we have a shot at it and Lesetja Kganyago, the SARB Governor, projects 2% economic growth in 2020 off 1.7 – 1.9% growth in 2019. Now I trust, that’s got you thinking!

Bottomline, we remain hopeful.

Yours in Property.