Economic Landscape

Although we expect that 2008 will most probably be the lower turning point in the property cycle, the forecast is for nominal house price growth to average between 10% and 12% per annum in the period 2008 – 2012. This implies that house prices will by 2012 be approximately 60 -70% higher than today, even after strong price growth in the past few years.

This year is therefore the year to buy, before price growth starts to accelerate again in 2009 on the back of expected better economic conditions and lower interest rates.

When looking further a field, the recent turn in the United States housing and financial sector is of some concern, but we do not expect there to be any direct impact on South Africa. South Africa and the local banking sector are not directly exposed to the sub-prime market, as our offering is based on sound lending practices.

In an attempt to avoid a recession, the US has cut interest rates aggressively. This may influence world growth and also South Africa’s export performance. Should a recession transpire, we could potentially see an indirect impact on our macroeconomic environment, which in turn could affect the ability of households to purchase properties.

When it comes to investment, property has always been a sound choice – especially over the medium to long term. Since 2000, real house price growth (that is excluding the effect of inflation) was in the order of 13,5% per annum. Very few other investments would have performed better, taking into account that property is a low-risk investment. When looking at economics, interest rate sensitive sectors, such as the property market, are important to the household and banking sectors. As one of the most sensitive sectors in the economy, the housing market is often referred to as the emotional sector because of its volatility as well as its value to the consumer.

A bank’s most significant relationship with a consumer/household centres around the mortgage loan. A house is generally the most expensive item a household will ever buy, but it is also one of the single biggest assets they will ever own. It is important because as an asset, it is a fundamental contributor to wealth creation for most families.

The potential contribution a home can make to a family’s financial wellbeing is proven when one reflects on the past few years. Since 2000, property prices have increased by about 20% per annum. Individuals who have not been in the property market during this period have lost out on one of the biggest creators of wealth in our country in a long time.

So what does this all mean today for our customers out there?
We know affordability will remain a big issue this year. House price growth is the lowest it’s been in seven years – it’s expected to dip below 10% in 2008.

This, coupled with the now tighter controls on credit provision, is likely to result in increased pressure on the applications acceptance rate. Buying patterns will change as customers opt for smaller, more affordable homes versus the bigger, more luxurious dwellings they have come to expect to buy with their rand. Bad debts are likely to increase, which means profitability and overall financial performance will need to be carefully managed.