The mild acceleration in the year-on-year growth rate in house prices in July is believed to be largely the lagged impact of slightly stronger demand times back in the summer quarters, due in part to late-2010 interest rate cuts. Looking forward, economic indicators released in July would suggest a possible increase in pressure on the market, and with it a possible slowing in house price growth later in the year once more.
The South African Economy, and thus to a large degree its housing market, is very much in sync with trends in the global economy, which at present looks to be showing signs of weakening. Over the past weeks, US lawmakers have been in a huge tussle aimed at reaching agreement on the terms and conditions accompanying a lifting of the legal government debt ceiling in that country. Should this not have been done by Tuesday 2 August, the possibility of that country defaulting on its government debt had been mooted. Default now appears unlikely, with reports that an agreement had been reached over the weekend. Nevertheless, even should default thankfully be avoided, the markets have been decidedly nervous about the whole matter, and ratings agencies have been talking about possible ratings downgrades for the US.
It will be tough for the US to avoid another recession, implying significant growth slowdown for the global and South African economy. This time around, with its policy interest rate at near zero and a pressing need to reduce its fiscal deficit and borrowing requirement, the US has less ammunition with which to fight any severe economic slowdown than it had in 2008.
And all the while, the fact is that US economic growth had already slowed to pedestrian pace by early this year, measuring 0.4% and 1.3% quarter-on-quarter annualized real economic growth rates for the 1st 2 quarters of 2011. Significantly higheroil prices ever since the start of the Egyptian and Libyan crises a few months ago must be seen as a key source of pressure, on what is also the world’s largest oil guzzling economy, during the 2nd half of the year too.
Domestically, sharp increases in both global oil and food prices have been instrumental in raising SA’s consumer price inflation to 5% year-on-year by June causing many economists to anticipate that the next move in interest rates will be up.
However, with signs that our own economy is coming under pressure due to global economic weakness, hikes in interest rates any time soon are far from a foregone conclusion, as inflationary pressures could start to wane soon on the back of economic weakness. Indeed, in the July SARB
onetary Policy Committee statement the Bank began to mention emerging downside risks to
inflation going forward that emanate from a weakening global economy.
But such a scenario of “low interest rates for longer” does not promise to be good news for property, because economic weakness itself has a major impact on the housing market due to the pressure it exerts on employment and household income growth.
With the world’s largest economy, the USA, under pressure, and we haven’t even mentioned the trouble that Europe is in too, our own economy is bound to come under pressure, and this can already be seen in the SARB Leading Business Cycle Indicator for SA, whose month-on-month growth rate has been negative for the past 3 months. Our own FNB Estate Agent Survey, in which we ask agents for their rating of the strength of demand, has already started to point to weakening, with the year-on-year rate of change in the demand rating actually even leading the G7 Leading Indicator downward.
Given this weak economic background, our expectation is for the recent acceleration in house price growth to be short-lived, with a slowing in the pace of growth resuming in the final months of 2011.
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