Ups and DownsBy Stuart Murray January 2010

House sales and prices are rising, confirmed by the latest bank statistics. In terms of this welcome trend continuing, a lot will

depend on the Reserve Bank’s interest rate decision this month - and on February’s Budget.

T he upturn in the residential property market, both in terms of sales and activity, which began to excite property professionals demoralised by the long drought,

has been confirmed by statistics published this month.

November’s house price inflation rose around 1,5% and this has been followed by a 2,7% increase in December - all the more remarkable considering the peak holiday season.

A late spurt in activity and volumes was even more noteworthy, helping to raise confidence that this Soccer World Cup year could see the market well out of its trough. An example is Pam Golding Properties Cape Region, which closed November at 39% over budget, recording activity across all price brands.

Looking at the longer term, First National Bank’s house price index shows that on a cumulative basis the 2009 index is 195,4% higher than the July 2000 level when the index began (at a level of 100).

Interest rates remain a key factor in sustaining the trend. The SA Reserve Bank’s monetary policy committee decision at its meeting on January 26 will be decisive in terms of confidence. Will rates remain on hold or will we get another cut? The full impact of last year’s five percentage cuts is still feeding through to the market, so a “hold” will probably make do for now. But any suggestion by the authorities that we may return to higher rates will be a severe blow to consumer confidence.

Consumers have to live with two measures of the prime interest rate - real and nominal. When the rate is calculated by subtracting consumer inflation from prime they get a real prime rate. So 10,5% minus 5,8% (November’s CPI) gives one a real rate of return of 4,7%.

Property investors - as opposed to those who buy a home in which to live - require both capital appreciation and income flow. They compare the cost of credit with the current capital growth on housing to give them an idea of their potential returns. Thus investing in residential property has not been attractive and accounts for the near collapse of the buy-to-let market.

So at present the consumer profile in the housing market is more or less based on the domestic buy-to-occupy segment. And it’s in this area that we have some imponderables. The domestic household debt to disposable income ratio is still high, which restricts the ability of households to borrow. Furthermore, the financial institutions are still imposing rigorous credit restrictions. Then we have ongoing job losses and redundancies and these make everyone nervous.

Taking an empirical view, economic times ahead are going to be tough - even though we have officially come out of recession. So far, fiscal policy has been helpful, maintaining growth in government spending (mainly infrastructural) while accepting the dilution in tax revenues due to falling corporate profits, lower consumer spending, and so on. Take revenue from the property industry’s transfer

duty as an example; that’s down by at least a half. Now we have the rumbles from the political left that Trevor Manuel, our former Finance Minister, should never have introduced all those lovely tax cuts which he dished out during his tenure.

Seriously, the consumer is in for some shocks this coming year - and by that I don’t mean Bafana Bafana winning the World Cup! Pressure is building on new Finance Minister Pravin Gordhan to raise taxes in the national budget next month - and the left is, predictably, crying for the rich to be targeted in terms of personal income tax.

Gordhan believes that corporate taxes should be in line with competing economies but that private taxes could be raised to address social backlogs. His view is that “all of us as a nation should carry the burden”, but with around 4 million individual taxpayers among a population of nearer 50 million, this doesn’t quite ring true.

Increasing Value Added Tax would be fairer but any consumption tax tends to penalise the poor and this is politically unacceptable unless government embarks upon a host of zero rated commodities and services. No doubt smokers and drinkers will receive their usual clout.

General opinion has it that the Gordhan will provide for a budget deficit of around 8% of gross domestic product, which is considered sustainable. This means more borrowing of course.

There will be shocks other than those which the budget has in store. The great Eskom saga continues - what will be the final result of the electricity provider’s price increase claims? But that’s part of the Big Picture. Keep your weather eye on the machinations of local councils as they try to recoup their spending sprees. Rates and other services will all creep up.

The problem for the consumer market, and that includes housing, is that household incomes are not keeping pace; in fact they are falling. Declining inflation has helped in that consumer price increases have been eating into disposable income at a diminishing rate. However, the levels of “stressed debt”, according to FNB, are still “too high for comfort”.

In general, however, the banks are in agreement that the tide has turned in the housing market. FNB, for instance, says it is cautiously optimistic and predicts an average house price inflation rate of 8% for 2010 as a whole. Home loans strategist John Loos has an interesting take on the potential of the World Cup to boost property sales. He reckons that if the event had taken place back in 2006 when property was an extremely popular asset class world-wide there could have been some impulse buying by foreign visitors. But global recession has taken much of the popularity out of property as an asset class. “Greed,” he says, “has turned to fear.”