Monday, June 1, 2009

South African house price index declined to 11.3% in May.

Same old story as in the States: cheap money, easy lending practices by banks and as a result inflated prices for real estate. It is amazing that there were no voices 3 years ago warning for the inevitable. Apparently this was a drug that we all took: the sky is the limit. I can understand that we should not expect politicians and bankers to warn about an Armageddon. After all, they profited big time from all of this: bankers through commissions and politicians through votes. But where were those people & regulatory organisations who were appointed to have an helicopter view? Like the SEC in the US. Were they political appointees and therefore toothless? Or were they just sitting on their hands? Or was the drug of easy money just too overwhelming for all of us?

Anyone out there with an opinion on South African regulatory organisations?

South African house price index declined to 11.3% in May.

Deflation caused by oversupply of residential stock- FNB House Price Index report.

The FNB House Price Index's decline continued in May, declining year-on-year to the tune of -11.3%. This represents a deterioration on the revised -9.2% rate of year-on-year decline recorded for April, and was the 6th consecutive month of year-on-year decline in the house price index.

On a month-on-month basis, the rate of deflation was -3% in April.

The price deflation is the result of a sizeable oversupply that has built up in the residential market, with selling due to financial pressure being a key driver of supply. With SA officially now in recession, conditions in the South African economy are hampering the pace of residential demand growth despite a series of interest rate cuts having already taken place.

Domestic interest rates have now declined by 450 basis points in total since the start of rate cutting in December 2008. This should bring some stimulus to a very credit-sensitive market such as the residential property market. However, unlike the 2003 aggressive interest rate cuts which took place in good global and economic times.

The current stimulus from interest rates is to a great extent offset by an economic recession which contains growth in household purchasing power.

As such, the expectation of nothing more than a very mild improvement in residential demand during 2009 continues, and with oversupplies still believed to exist on the market, house price deflation is expected to be with us for most of 2009.

However, the worst year-on-year price deflation will show in the figures around mid-year, and that during the second half of the year we'll begin to see the rate of decline subsiding.

At the most recent SARB interest meeting, the Governor did begin to prepare the market for a possible pause in interest rate cutting, so although all future interest rate decisions depend on how future economic events unfold, we should not expect too much in the way of interest rate cutting from here forward.

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