Download A Economic Preview of 2004

The South African Economy
& Property Market
Presented by:
Dawie Roodt
19 June 2008
In This Presentation:
1.
2.
3.
4.
5.
6.
The US Subprime Crisis
SA: Economic Overview
Monetary Policy
Eskom
Property Trends
Asset Allocation
Subprime, Say Wha’ ??
• Subprime definition:
– A loan that is offered at a rate above prime
(0.1% - 0.6% higher) to individuals who do not
qualify for prime rate loans.
•
•
•
•
A.k.a “NINJA” loans
Improved Borrowing Power
Decline in Lending Standards
Large-scale lending and borrowing
U.S. Borrowing Power
-39.4%
Source: T2 Partners LLC, March 2008
Decline in Lending Standards
Since 2001:
Between 1995 and 2006
– Combined Loan to Value increased from
Total
79.8%
toValue
89.1%of Subprime Loans
Increased
– 100% Financing more than Tripled
15 times!!
($40
bn
to
$600bn)
– “Liar’s Loans” almost Doubled
Source: T2 Partners LLC, March 2008
Fed Funds Rate – A Matter of
Interest
Federal Funds Rate
6.5
5.5
4.5
3.5
2.5
Subprime Lending
1.5
0.5
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Federal Funds Rate
Jan-06
Jan-07
“Poppo Strikes The Fan”
• Dec 2004:
interest rates hiked 125%
from 1% to 2.25%
•
•
•
•
Continuously hiked till 5.25% (Jun 06 to Aug 07)
Borrowers start to default..
Banks and Securities firms report losses
Total losses are estimated +/- $900bn losses
(est) –
– Nearly FOUR times the SA’s economy!!
Fed Funds Rate – A matter of
Interest
Federal Funds Rate
6.5
5.5
4.5
3.5
2.5
Subprime Lending
1.5
0.5
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Federal Funds Rate
Jan-06
Jan-07
Jan-08
Fed’s Rescue Plans
• Dramatic cuts in interest rates:
5.25% (Sept 07) to 2.25% (Mar 08)
• $200bn Securities for Mortgage Loans
• $168bn Fiscal Injection
• Lender of Last Resort
• Orchestrate buy-out of Bear Sterns by JP
Morgan Chase
• Major Regulation Overhaul: Fed gains more
oversight responsibility
Consequences…..
•
•
•
•
Weaker Dollar
Inflation concerns
Slower U.S. growth
Rush to Commodities
Next Bubble….
Commodities..??
South Africa
Economic Overview
2006
2007
2008
M3 (average)
23.1%
23.7%
20.7%
PSCE (adj. average)
27.6%
22.2%
18.4%
CPIX (average)
4.6%
6.5%
10.7%
Prime (end of year)
12.5%
14.5%
16.0%
Current Account: Nom
-R111.0bn
-R138.2bn
-R160.0bn
Current Account: GDP
-6.4%
-7.3%
-6.9%
R/$ (end of year)
R7.04
R6.84
R7.50
GDP (full year)
5.4%
5.1%
3.0%
(0.3%)
0.7%
1.0%
Budget Surplus/(Deficit):
GDP
Monetary Policy
Inflation
CPI and CPIX
15
CPIX Ave 2008:
10.7%
12
9
6
3
0
Jan-01
Jan-03
Jan-05
CPIX
EstmX
Jan-07
CPI
Jan-09
Jan-11
Estm
Source: StatsSA and own calculations
“Behind the Curve”:
Repo & CPIX
14
12
10
8
6
4
2
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
Repo
Line 2
CPIX
CPIX (20%)
Inflation…The Real Villain
• Price
= Purchasing Power of $
• Thus, if wage increases don’t equal price
increases – WE are WORSE off
• AND…
– The poor spends more of their money on living
expenses than the rich
– Thus, inflation is almost a “tax on the poor”
“The Good, the Bad & the Ugly”
• The Good –
 Economy still likely to grow
• The Bad –
 C/A Deficit
 Credit demand remains strong
 End of Inflation targets?
• The Ugly  Eskom
 Toothless SARB
GDP
GDP at Market Prices
%
GDP market prices, q:q seasonal
8
7
Construction
3.5% of GDP
Best Performing Sector
2007, 2008Q1 (real 14.9% y:y)
6
5
4
Average:
3%
3
2
1
0
2002
2003
2004
2005
2006
2007
2008
Source: StatsSA and own calculations
A Quick Eish’kom
Calculation
Vision:
"Together building the powerbase
for sustainable growth and
development."
Load Shedding: The 3 Hour Effect
Average GDP per day:
•
•
•
GDP, 2007 (current): R1,973.4bn
Workdays: 240
GDP per day: R8.3bn
Average GDP per sector:
• Allocate equal weights to GDP sectors: (3 out of 24)
– Loss per day: R1.1bn (13.3%)
Average GDP loss per sector:
• Allocate weights to GDP sectors:
– Finance, real estate and business services (3 out of 8)
– Mining and quarrying (3 out of 24),etc.
– Loss per day: R1.9bn (22.8%)
Potential Job Losses
Case Study:
+/- 500 000 employees in Mining Sector
Mining production at 95% electricity – Lose 10% - 15%
1% loss in production = 1% reduction in workforce
Thus, potential reduction in mining workforce:
50 000 – 75 000 jobs lost
Source: Thousands face job chop at GFI, 31 Jan 2008, Fin24
GDP Loss: Base Case Scenario
Adjusted Growth Estimate:
4.6% na 3.0%
Loss in Real Terms:
R19.76 bn
Potential Loss in Tax Revenue:
R5.9 bn
Debt Levels
Household debt to
disposable income
%
Household debt to disposable income of households
80
Q108:
78.2%
75
70
59.4%
65
56.9%
60
55
50
50.2%
44.5%
45
40
1970
1975
1980
1985
1990
1995
2000
2005
Source: SARB and own calculations
Savings to disposable
income of households
Ratio of saving by households to disposable income of households
%
12
9.2%
10
8
5.4%
6
4
2.6%
2
0.5%
0
-2
1970
1975
1980
1985
1990
1995
2000
2005
Source: SARB and own calculations
Debt Servicing Costs
of Households
Interest Rates & Household Debt Servicing Costs
%
17.5
15.0
12.5
10.0
7.5
5.0
2000
2001
2002
2003
2004
Debt Servicing Cost
2005
2006
2007
2008
Avg Prime
Source: Quarterly Bulletin, SARB & Efficient Research
Final Consumption Expenditure by
Households
Final Consumption Expenditure by Households (Q:Q change)
%
10
9
8
7
6
5
4
3
2
1
0
Q1 02
Q1 03
Q1 04
Q1 05
Q1 06
Q1 07
Q1 08
Source: SARB and Efficient Research forecast
Property Trends
Housing Trends
%
Real house prices vs Real interest rates
30
25
20
15
10
5
0
-5
-10
-15
-20
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: Absa House Price Index, StatsSA and own calculation
Gross Fixed Capital Formation:
Residential Buildings
Residential Buildings (constant 2000 prices) & Real Growth y:y
R millions
8,000
y:y %
25
7,000
20
6,000
15
5,000
10
4,000
5
3,000
0
2005/01/01
2005/07/01
2006/01/01
2006/07/01
Residential
2007/01/01
2007/07/01
Growth y:y
Source: Quarterly Bulletin, SARB & Efficient Research
Gross Fixed Capital Formation:
Non-Residential Buildings
R millions
Non-Residential (constant 2000 prices) & Real Growth y:y
6,500
y:y %
16
5,500
12
4,500
3,500
8
2,500
4
1,500
500
0
2005/01/01
2005/07/01
2006/01/01
2006/07/01
Non-Residential
2007/01/01
2007/07/01
Real y:y
Source: Quarterly Bulletin, SARB & Efficient Research
Value of Buildings Completed
Change in Value of Buildings Completed
% y:y 3m ave
70
60
50
40
30
20
10
0
-10
-20
-30
Q1
2000
2001
Jan-00
01-Jan-06
2002
Jan-01
01-Jan-07
2003
2004
Jan-02
01-Jan-08
2005
Jan-03
2006
Jan-04
2007
2008
Jan-05
Source: StatsSA
Value of Buildings Completed
Change in Value of Buildings Completed
% y:y 3m ave
70
60
50
40
30
20
10
0
-10
-20
-30
Q1
2000
2001
2002
2003
Total value of buildings
2004
2005
2006
2007
2008
Non-residential
Source: StatsSA
Value of Buildings Completed
Change in Value of Buildings Completed
% y:y 3m ave
70
60
50
40
30
20
10
0
-10
-20
-30
Q1
2000
2001
2002
Total value of buildings
2003
2004
2005
Residential
2006
2007
2008
Non-residential
Source: StatsSA
Value of Buildings Plans Passed
Change in Value of Building Plans Passed
% y:y 3m ave
80
70
60
50
40
30
Q1
20
10
0
-10
2000
2001
Jan-00
01-Jan-06
2002
Jan-01
01-Jan-07
2003
2004
Jan-02
01-Jan-08
2005
Jan-03
2006
Jan-04
2007
2008
Jan-05
Source: StatsSA
Value of Buildings Plans Passed
Change in Value of Building Plans Passed
% y:y 3m ave
80
70
60
50
40
30
Q1
20
10
0
-10
2000
2001
2002
2003
Total value of buildings
2004
2005
2006
2007
2008
Non-residential
Source: StatsSA
Value of Buildings Plans Passed
Change in Value of Building Plans Passed
% y:y 3m ave
80
70
60
50
40
30
Q1
20
10
0
-10
2000
2001
2002
Total value of buildings
2003
2004
2005
Residential
2006
2007
2008
Non-residential
Source: StatsSA
Residential Property
Trends
Factors Impacting Residential
Property
•
•
•
•
•
Higher Inflation & Interest rates
Higher Debt Servicing costs
Slower Economic growth
Slower growth in Disposable Income
Stricter Lending Standards (NCA)
Affordable Housing:
Real growth Q108: 3.5% y/y (2007 11.2%; 2006 9.7% y:y)
Q108: R277 000
Source: Absa Housing Review, Q208
Middle-Segment Housing:
Real growth Q108: -0.3% y:y (2007 7.0%; 2006 10.1%)
Q108: R976 000
The first real decline since
Q2 1999 (-2.3% y:y)
Source: Absa Housing Review, Q208
Luxury Housing
Real growth Q108: -2.9% y:y (2007 1.0%; 2006: 6.0%)
Q108: R4.2m
Q307: -0.6% y:y
The first real decline since Q4 2002
Source: Absa Housing Review, Q208
Building Cost
of Middle Segment Housing
Avg cost increase Q108: 9.6% (2007 9.5%; 2006: 11.1%)
Upward Pressure:
Demand for Building Material
Skilled Workers
Downward Pressure:
Softer Housing Market
Source: Absa Housing Review, Q208
New vs Old Houses
New House (Q108) = R1,055m
(real 5.7% y/y)
Existing House (Q108) = R960 000
(real -2.0% y/y)
New house is 9.0% or R95 000 cheaper
Source: Absa Housing Review, Q208
Housing Affordability
Source: Absa Housing Review, Q208
Given these trends…
Buyer’s Market
Buy-to-Let Market
Annual House Price Growth
(Nominal)
Country
2006
2007
Latest
South Africa
U.K.
U.S.
Norway
15.4
8.0
6.5
13.2
14.5
9.7
2.0
12.4
8.7
4.2
-0.3
7.3
Switzerland
Sweden
Ireland
3.2
12.2
11.8
2.6
10.2
-7.3
2.4
11.3
-7.3
Australia
New Zealand
7.0
10.5
10.2
12.1
12.3
11.4
Source: Financial Stability Review SARB, March 2008
International Comparison:
All Property Returns
Total Return
(% y:y)
Source: IPD Annual Property Index, 2007
Performance: After-Tax Return of
Different Asset Classes
Source: Asset Performance Survey 2008, Credit Suisse Standard Securities
Possible Investment Opportunities
2006
M3 (end of year)
23.1%
Financials
PSCE (adj. end of year)
27.6%
- Banks
Financials
CPIX (average)
4.6%
Retailers
Positive for equity, property
Prime (end of year)
Negative12.5%
for bonds
Current Account: Nom
2007
2008
23.7%
20.7%
22.2%
18.4%
6.5%
10.8%
14.5%
16.0%
-R111.0bn
-R138.2bn
Negative
equities
bonds
(short term)
Current Account: GDP Negative
-6.4%
-7.0%
Positive
for
rand
hedges
Positive bonds (long term)
Negative for7.04
importers
R/$ (end of year)
6.84
Positive
rand
Negative
forhedges
bonds
GDP (full year)
5.4%
5.1%
Positive exporters
Negative importers
Neutral equities
Negative
bonds
Positive bonds
-R160.0bn
-6.9%
7.50
3.0%
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