I have a friend who uses the term: The Next Big Thing,  quite often. It intrigues me as a concept.

However, the Last Big Thing is what I’d like to discuss quite briefly today.

In our previous blog I surmised the possibility that rates, both here and in the USA would remain the same. They did. I wrote:

So we have Interest rates stable or well managed, Inflation hopefully will peak and decline a little and Employment will remain soft but stable. If that is true, then Affordability comes into play. You see, cost prices of houses are declining. Therefore loans-to-values will increase. Therefore there will be a few happier credit managers around the place prepared to take a better view of your customers’ mortgage application. Affordability will kick into play – all of the positive, easy-to-feel effects of a Consumer more capable of paying for houses whose prices have decreased. Now that’s good news.

I was correct on the rates so the question now remains whether affordability will improve over the medium-term. That we shall see.

But this matter of stable interest rates is certainly “the last big thing”. In the USA, it means that the Federal Reserve is concerned that should they raise the rates they may snuff out the growth they are enjoying. This is double-edged – on the one hand the cost of debt remains stable and historically low. But, on the other hand, it implies that the FED is concerned that growth is not vibrant and could be nipped in the bud.

As a result, the stock markets react quite negatively to the news. In fact, they rise when the oil price rises as historically, this has meant higher demand from industrialized nations. In the old economies, prior to Sub-Prime 2008-10, a rise in oil prices predicated a rise in interest rates as economies were growing and inflation needed to be tempered. These days, the oil price is driven more by Saudi Arabia deciding on production levels – at the moment these are creating an oversupply.

As regards rates, Quantitative Easing [QE] [read: printing money] is driving the interest rate discussion. In a recent article I read, in the USA $3trillion of QE has occurred and still the economy is sluggish. This is a quandary for the FED and hence the reticence to raise rates. Bear in mind that whilst we talk about America, there is hardly a leading nation that has not QE’d their way out of Sub-Prime. Some described Sub-Prime as a seismic shift at the time [as they have recently also described Brexit]. Fact is, it was, and the hangover still remains. One good thing for us is that the US$ is a little weak and so that helps us in our imported inflation, especially the cost of Oil.

So what does The Last Big Thing mean to us in South Africa?

  1. We can enjoy the respite of, at least, stable interest rates.
  2. We continue to enjoy relatively inexpensive fuel.
  3. Our inflation rate is under control.
  4. We allow ourselves a little headroom to accommodate our poor politics.
  5. We gain from commodity prices wherever these occur and enjoy coming off very low bases.
  6. It helps with further unemployment.

Downgrade risk aside, our real problem is the long-term effect of Zero growth. In my memory, I cannot remember when we have endured such a long period of <1% growth whether the higher rate of growth was organic to our economy or induced by the intervention of Financial Authorities. But in the meantime, volumes of homeloan sales are performing relatively well compared to last year whilst house price increases are slowing. My Affordability theory is therefore still possible. Not a bad place to be under the circumstances.

I guess, all said and done, it’s going to come down to our attitude, commitment and hard work. Homeloan Junction may understand the economic situation but refuses to comply with its rules. It reminds me, many years ago in Nedfin Bank we had a saying in recessionary times: “We have heard there’s a recession. We refuse to take part.” There isn’t a recession in South Africa but even if there was a sniff of it, Homeloan Junction refuses to take part.

Yours in Property

Jack Trevena
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