Housing Market Indicators

Private Property South Africa
Gina Schoeman

'Shaken, not stirred' - making sense of the macroeconomic indicators and the housing market.

Just as James Bond makes a comeback in our cinemas year after year, so will

the inevitable cycle of the South African housing market in our economy. What

exactly lies behind the interminable cycle of a property market? How does one

make sense of the many macroeconomic indicators that headline the front pages of

our favourite newspapers and news channels? And finally, how can these major

indicators assist you in making sense of the housing market?

Now, I'm no cocktail connoisseur, but just like a good martini, knowing the

correct measurements and how to combine the major ingredients is crucial in

understanding the flavour of the drink. And similar to our housing market,

getting to know the measurements and combinations of some of the major

macroeconomic indicators is fundamental to the flavour of the future property


Although it is a well-known fact that the prime interest rate has been a major

driver of the property market over the past few years, this is mainly due to the

fact that it declined considerably in a relatively short period. With the

interest rate environment now sitting on a relatively stable path, and

forecasted to remain relatively stable going forward, the property market cannot

depend on another large decline in interest rates to drive growth upward. For

this reason, GDP growth averaging between 4% and 5% is a more sustainable driver

for long-term growth in the future. Four popular indicators that influence GDP

growth and the housing market have been chosen for the purpose of this article,

and for no other reason than the fact that they are so commonplace in our

everyday lives:

  • CPIX

  • Private Sector Credit Extension (PSCE)

  • The Rand/Dollar Exchange Rate

  • Brent Crude Oil Price

CPIX (best known as consumer price inflation which excludes the effect of

mortgages) essentially measures how quickly prices of consumer goods are

increasing. The South African Monetary Policy Committee follows an

inflation-targeting regime whereby the Repo rate is used as a mechanism in order

to maintain CPIX between a target of 3% and 6%. As a result, when CPIX is seen

to be creeping up to the 6% ceiling (in other words, prices are increasing in

response to increasing consumer demand) the MPC may be inclined to increase the

Repo rate in order to slow consumer spending, as a higher interest rate

translates into higher debt repayment. The CPIX was reported at the 5% level

(year-on-year) in December 2006 and its future path is forecasted to be

relatively stable.

PSCE measures the level of credit extension in South Africa; in other words, the

rate at which individuals are taking on more credit into their personal

portfolios. Currently, year-on-year growth in PSCE sits at 25.8% for December

2006 and, although lower than previous months, this rate is desired to decrease

even further as it indicates a higher-than-desired take-up of credit. The danger

of high credit extension lies in the fact that should the Repo rate need to be

increased in order to maintain inflation, this will harm the health of

consumer's ability to spend, due to their already over-extended portfolios. The

tricky bit here is that in order to fuel GDP growth, the economy requires that

consumer spending remain healthy and robust, however, not to the point whereby

individuals become overly indebted.

Taking two steps back, it can be seen that consumer spending affects CPIX, which

in turn influences the prime interest rate. At the same time, PSCE affects the

level of credit which in turn, affects inflation, and thus the MPC's decision on

the prime rate. However, a healthy level of consumer spending is needed in order

to stimulate GDP growth for the future. And so, the ropes are already becoming

tangled as the causality between one indicator and another begins to overlap.

And then you get the infamous Rand/Dollar exchange rate - one of the primary

topics at the dinner table - what's it doing and where's it going? The South

African Rand is one of the more volatile exchange rates trading in the global

markets. This openness to the global markets takes away a certain degree of

certainty with which our country is able to predict the future value of its

currency, thus sparking large debate over whether it is over- or under-valued,

what its optimum level is for our exporting industry, and where our country

would like to see it sit in the future. The exchange rate's influence on the

housing market comes once again back to its influence on CPIX, and thus the

prime interest rate. If the rand strengthens, imports become relatively more

affordable, and thus as more imports are demanded and purchased, CPIX rises. The

result is a higher level of imports being brought into the country (thus

affecting our trade account, and consequently our current account deficit as a

percentage of GDP - but that's a whole other story!) which pushes the CPIX level

closer to the ceiling target of 6%, thus fuelling the need for an increase in

the Repo rate.

And finally, the never-ending ongoing drama of the oil price. It always seems

rather odd to me how the world ever got themselves into this mess of oil

dependency and cartels. But the reasons are attributable to days gone by and the

decisions of our forefathers. Oil, as a direct contributor to our energy sector,

largely affects our popular friend, CPIX, due to the amount that needs to be

imported and the price at which it enters the country (the exchange rate at

which it is purchased). As a result, should the price of oil increase (and in

turn, it's highly irritating cousin, the fuel price) the prices of consumer

goods will increase. This is not the only manner in which oil as a commodity

affects our economy, but one of the more simplistic ways in which to understand

it's effect on CPIX, the prime interest rate, and ultimately, the housing

market. The current price for Brent Crude oil has subsided over the last few

months, mainly due to a warmer-than-expected winter in the northern hemisphere

and the resulting need for less heat. In South Africa, the oil price contributes

significantly to CPIX and its recent decline has played a part in CPIX remaining

below the 6% ceiling.

The general ins and outs of just some of the indicators we see so often

splattered across newspaper billboards has been unpacked, but what is the

general consensus of the economy's temperature? What type of housing market is

this cocktail mix creating? Any economy moving from developing to developed

status will experience its own unique combination of both success and failure

along the way. Given the positive sentiment within the South African economy,

together with the faith and drive for a better future, these major economic

indicators point to a housing market that is expected to remain healthy and

sustainable. House price growth has remained steadily at a year-on-year figure

of 6% for the beginning of 2007, and is expected to pick up speed in 2008 as the

expanding middle class continues its demand for housing.

And so, the question must be posed: do we want this economy shaken or stirred?

According to the experts, shaking may result in a more satisfying drink, but may

'bruise' the spirit. Personally, I say shake it like a Polaroid Picture because

this country has more spirit than any bartender could ever attempt to combine.

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