'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
market.
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.
