JOHANNESBURG (November 20) - After two years of deepening hardship, in which interest rates have been increased ten times, prime rising to 15,5%, we may finally be coming to a turning of the financial cycle. Other shock absorbers have already been operational for some time, protecting the economy from the worst fallout of recent events.
The Rand weakened by 10% in 1H2008, and a further 30% in 2H2008, shielding many producers, especially miners, farmers, manufacturers, but also some service providers (tourism) and building contractors from adverse business conditions. The ultimate giveback was oil, collapsing in four months from $150 to $50, one of the more bizarre and rather unexpected developments of 2H2008. This oil gift assisted in protecting the country from the impact of falling export prices.
The Finance Minister furthermore continued government spending even as his tax revenue started to suffer from the slowing economy, indeed spending more on public salaries (pushed higher by inflation) and infrastructure. Thus despite private sector slowing this year, the public sector remained an important growth anchor. But with inflation finally peaking over 13% in 3Q2008, the die looks cast for a plunging inflation rate in 2009, with interest rates following at least a part of the way. With oil and food prices easing, and overdue statistical changes, the CPI inflation rate is set to plunge towards 6% by mid-2009. And this despite the weakened Rand and its implications for higher imported inflation. As the SARB acquires greater confidence regarding the upside risks governing the inflation prospect, especially regarding second-round salary effects and the global financial crisis implications for the Rand, the more willing it should eventually become to start easing interest rates. Prime could fall as low as 13% by mid-2009, and possibly somewhat lower by end-2009, depending on actual developments.
Such interest rate easing is likely to assist in stemming the inventory and private fixed investment cutbacks, if with a lag. Also importantly, it may influence replacement decisions by households regarding important consumption purchases such as cars, furniture and other household appliances and necessities. With the risk of higher interest rates waning as we move deeper into a rate-cutting cycle, and the debt servicing burden of households reducing as nominal incomes keep growing even as interest rates decline, households should become more confident to take on longer term commitments.
In the course of next year, especially by 2H2009, we may have some hope of the economy gradually reviving once again. If so, it will likely do so in tandem with the world economy, which by then is also expected to be growing again. Such global growth will be very much a function of a successful ending to the present financial crisis, the very aggressive interest rate easing we can observe around the world in progress today, and the equally aggressive fiscal boosting, especially in China and America but not limited thereto. Thus South Africa will probably pull itself up mostly by its own bootstraps next year, but it will be importantly assisted by the rest of the world also doing so. Together we will make it come true! If end 2008 will probably still be a rather bleak festive season as we collectively tighten belts going through the roughest patch of this cyclical adjustment, the 2009 festive season should already be a much more upbeat affair, by then well launched on our road to the 2010 World Cup. That would be great timing.
Cees Bruggemans is Chief Economist of First National Bank.
Go to www.ipsinvest.com for more information.
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Sunday, November 23, 2008
Property sales rise in October
Property sales rose by 8% in October, according to the latest figures from HM Revenue & Customs (HMRC).
At 65,000, sales were 5,000 higher than in September, the first monthly increase since May.
However, they were still 50% down on a year ago, with banks and building societies reluctant to lend because of the credit crunch.
Some experts are worried that sales may start falling again because the economy is heading for recession.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics) said the figures were evidence that the dramatic slump in sales over the past year had stabilised recently.
"This improvement is broadly consistent with CML mortgage lending data and the Rics new buyer enquiries," he said.
"Falling house prices and lower interest rates are encouraging some buyers back into the market but the big risk is the worsening economic climate and the knock-on impact on employment," he added.
Mortgage tap
The recent peak in sales was in December 2006 when 154,000 homes were sold.
But transactions started to collapse in September last year, as lenders turned off the mortgage tap in response to the growing credit crunch, in turn triggering the most rapid fall in UK house prices since the early 1930s.
Banks and building societies found that the market for borrowing money from other financial institutions closed down, and the mortgage market imploded.
This was highlighted by the near-collapse of the Northern Rock bank and the more recent government rescue of the Bradford & Bingley and HBOS.
With the economy now widely believed to be heading for recession there is the obvious possibility that would-be buyers will be deterred further, either by a lack of confidence or by losing their own jobs.
As a result, many commentators believe that prices will continue falling well into next year.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7742048.stmPublished: 2008/11/21 13:56:23 GMT© BBC MMVIII
Go to www.ipsinvest.com for more information
At 65,000, sales were 5,000 higher than in September, the first monthly increase since May.
However, they were still 50% down on a year ago, with banks and building societies reluctant to lend because of the credit crunch.
Some experts are worried that sales may start falling again because the economy is heading for recession.
Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics) said the figures were evidence that the dramatic slump in sales over the past year had stabilised recently.
"This improvement is broadly consistent with CML mortgage lending data and the Rics new buyer enquiries," he said.
"Falling house prices and lower interest rates are encouraging some buyers back into the market but the big risk is the worsening economic climate and the knock-on impact on employment," he added.
Mortgage tap
The recent peak in sales was in December 2006 when 154,000 homes were sold.
But transactions started to collapse in September last year, as lenders turned off the mortgage tap in response to the growing credit crunch, in turn triggering the most rapid fall in UK house prices since the early 1930s.
Banks and building societies found that the market for borrowing money from other financial institutions closed down, and the mortgage market imploded.
This was highlighted by the near-collapse of the Northern Rock bank and the more recent government rescue of the Bradford & Bingley and HBOS.
With the economy now widely believed to be heading for recession there is the obvious possibility that would-be buyers will be deterred further, either by a lack of confidence or by losing their own jobs.
As a result, many commentators believe that prices will continue falling well into next year.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/7742048.stmPublished: 2008/11/21 13:56:23 GMT© BBC MMVIII
Go to www.ipsinvest.com for more information
Buying power does not equate to value
Buying power does not equate to value By Coert Coetzee
I'm amazed at how the smart people are not as smart as they think. I'm referring here to the prophets of doom and the economists who are telling the world how house prices are falling at the moment, and explaining how the prices of houses being sold now and the size of bonds being registered now compare to those that were sold or registered last year. One such clever bond originator, who is now providing “statistics” too, came to the educated conclusion that house prices have fallen by 5.5% since last year. And it isn't just the smart bond originator who has come to this conclusion. The banks are doing the same, although at least they believe that property is still growing positively. You're probably wondering why I am suggesting that this bunch is stupid, so let me explain.
Let's say that 10,000 first-time buyers bought houses in September 2007. With their income and affordability they could each buy a house for R500,000. One year later the interest rate has gone up by one percentage point. In the meantime they've also had a salary increase, but this was immediately cancelled out by the high inflation rate. This means that with exactly the same affordability amount or buying power they can now, due to the higher interest rate, only afford a house of R470,000. So that is what they buy.
Let's summarise. In 2007 they bought R500,000 houses. In 2008 they are buying R470,000 houses. But this doesn't automatically mean that they are buying R500,000 houses for R470,000. They have moved into a different price bracket as a result of inflation and interest rates. So it's not the prices of the houses that have fallen; it's the buying power that has decreased.
I know some people are now probably confused, so I am going to explain with reference to a fictitious and extreme example: if things go very well in year one, most people buy expensive houses of R1,000,000. If things go very badly in year two, most people buy houses of R500,000, because that's all they can afford. If you now compare year one's sales with year two, and you have exactly the same number of transactions, it will appear at first glance as though the prices have dropped by 50%. But that's not the case. Instead it is the buying patterns and buying power that have changed. Year one's houses are not the same houses as year two's. They may not even be in the same area!
This is the fundamental problem with these smart people's indices. They are comparing apples with pears. I know growth rates are down, but I think the economists are being irresponsible with their incorrect analyses. These statistics create the wrong perceptions and fan negativity.
Is bad or is it good?
Let's leave the economists now, and turn our attention to the wonderful world in which we live. There are two sides to everything. How bad or how good something is depends on you. Some people see problems, while others see only opportunity. Today I want to take a look at how recent world events might influence us. I'm going to list a few events, and then look first at the downside , before looking at the upside. The downside is generally the opinion of pessimists, while the upside is my opinion. Of course, you know that I am the eternal optimist!
National Credit Act
Bad: Some people, like some estate agents and bond originators, are still blaming the National Credit Act for their misery that started at the time of its implementation in June 2007. After nearly a year and a half, they still don't know how to deal with it; so they are retrenching people and closing businesses.
Good: Companies and clients who use the Treoc double trust structure are not being affected by it at all. On the contrary, they are benefiting from it. Trusts with at least two trustees, one of whom is an independent trustee, are excluded from the National Credit Act.
Electricity Shortage
Bad: Developers are complaining because municipalities are turning down proposed new developments due to their inability to provide electricity.
Good: The shortage of new developments will result in a shortage of housing. This will in turn eventually lead to good capital growth, once demand starts to exceed supply. On average it takes four years to take a new development from planning through to occupation. So those developments that are being completed now were already in planning a few years ago. And most of those that should be completed in 2012 are not even in planning right now. I think 2012 is going to be a bumper year for the capital growth farmers!
High Interest Rates
Bad: People who didn't plan and take precautions are now losing their houses.
Good: People who planned and took precautions, like the Treoc Investors, are buying the houses of those mentioned above at low prices.
High Oil Price
Bad: It chases inflation up and causes interest rates to go up or to remain high. Uninformed people think the high interest rate is permanent, and so they panic.
Good: Thanks to inflation the interest rates are high, and this keeps property prices low. The buyers' market is getting better every day. Informed investors know that this is a cycle, and so they don't panic. They know that everything that goes up will come down again - as has been happening for centuries already.
The Global Credit Crisis
Bad: Fear causes people to make wrong decisions; they think that debt and credit are evil, or they think that the bank's money is all gone and so they don't even try to get credit. They don't buy houses.
Good: Well-informed people know that the banks' main source of income is credit extension, and they use this opportunity to get bonds. They buy houses like never before. I myself have bought six houses in the last two weeks – without it costing me a single cent!
ANC Split
Bad: We are going to have a civil war.
Good: The government immediately pulls up its socks. It's been a long time since they made so many of the "right" noises in such a short time. They are even going to tackle corruption! Strong opposition will do wonders for our country.
American Presidential Election
Bad: The bottom has dropped out of the world for white racists.
Good: To me, a change is as good as a holiday, and I think most people feel that way. A holiday feeling is an optimistic feeling, and I think Obama has caused a worldwide optimism to take hold. Let us hope it continues to grow, because if there is one thing that the world needs right now, it's optimism!
Happy House Hunting!
I'm amazed at how the smart people are not as smart as they think. I'm referring here to the prophets of doom and the economists who are telling the world how house prices are falling at the moment, and explaining how the prices of houses being sold now and the size of bonds being registered now compare to those that were sold or registered last year. One such clever bond originator, who is now providing “statistics” too, came to the educated conclusion that house prices have fallen by 5.5% since last year. And it isn't just the smart bond originator who has come to this conclusion. The banks are doing the same, although at least they believe that property is still growing positively. You're probably wondering why I am suggesting that this bunch is stupid, so let me explain.
Let's say that 10,000 first-time buyers bought houses in September 2007. With their income and affordability they could each buy a house for R500,000. One year later the interest rate has gone up by one percentage point. In the meantime they've also had a salary increase, but this was immediately cancelled out by the high inflation rate. This means that with exactly the same affordability amount or buying power they can now, due to the higher interest rate, only afford a house of R470,000. So that is what they buy.
Let's summarise. In 2007 they bought R500,000 houses. In 2008 they are buying R470,000 houses. But this doesn't automatically mean that they are buying R500,000 houses for R470,000. They have moved into a different price bracket as a result of inflation and interest rates. So it's not the prices of the houses that have fallen; it's the buying power that has decreased.
I know some people are now probably confused, so I am going to explain with reference to a fictitious and extreme example: if things go very well in year one, most people buy expensive houses of R1,000,000. If things go very badly in year two, most people buy houses of R500,000, because that's all they can afford. If you now compare year one's sales with year two, and you have exactly the same number of transactions, it will appear at first glance as though the prices have dropped by 50%. But that's not the case. Instead it is the buying patterns and buying power that have changed. Year one's houses are not the same houses as year two's. They may not even be in the same area!
This is the fundamental problem with these smart people's indices. They are comparing apples with pears. I know growth rates are down, but I think the economists are being irresponsible with their incorrect analyses. These statistics create the wrong perceptions and fan negativity.
Is bad or is it good?
Let's leave the economists now, and turn our attention to the wonderful world in which we live. There are two sides to everything. How bad or how good something is depends on you. Some people see problems, while others see only opportunity. Today I want to take a look at how recent world events might influence us. I'm going to list a few events, and then look first at the downside , before looking at the upside. The downside is generally the opinion of pessimists, while the upside is my opinion. Of course, you know that I am the eternal optimist!
National Credit Act
Bad: Some people, like some estate agents and bond originators, are still blaming the National Credit Act for their misery that started at the time of its implementation in June 2007. After nearly a year and a half, they still don't know how to deal with it; so they are retrenching people and closing businesses.
Good: Companies and clients who use the Treoc double trust structure are not being affected by it at all. On the contrary, they are benefiting from it. Trusts with at least two trustees, one of whom is an independent trustee, are excluded from the National Credit Act.
Electricity Shortage
Bad: Developers are complaining because municipalities are turning down proposed new developments due to their inability to provide electricity.
Good: The shortage of new developments will result in a shortage of housing. This will in turn eventually lead to good capital growth, once demand starts to exceed supply. On average it takes four years to take a new development from planning through to occupation. So those developments that are being completed now were already in planning a few years ago. And most of those that should be completed in 2012 are not even in planning right now. I think 2012 is going to be a bumper year for the capital growth farmers!
High Interest Rates
Bad: People who didn't plan and take precautions are now losing their houses.
Good: People who planned and took precautions, like the Treoc Investors, are buying the houses of those mentioned above at low prices.
High Oil Price
Bad: It chases inflation up and causes interest rates to go up or to remain high. Uninformed people think the high interest rate is permanent, and so they panic.
Good: Thanks to inflation the interest rates are high, and this keeps property prices low. The buyers' market is getting better every day. Informed investors know that this is a cycle, and so they don't panic. They know that everything that goes up will come down again - as has been happening for centuries already.
The Global Credit Crisis
Bad: Fear causes people to make wrong decisions; they think that debt and credit are evil, or they think that the bank's money is all gone and so they don't even try to get credit. They don't buy houses.
Good: Well-informed people know that the banks' main source of income is credit extension, and they use this opportunity to get bonds. They buy houses like never before. I myself have bought six houses in the last two weeks – without it costing me a single cent!
ANC Split
Bad: We are going to have a civil war.
Good: The government immediately pulls up its socks. It's been a long time since they made so many of the "right" noises in such a short time. They are even going to tackle corruption! Strong opposition will do wonders for our country.
American Presidential Election
Bad: The bottom has dropped out of the world for white racists.
Good: To me, a change is as good as a holiday, and I think most people feel that way. A holiday feeling is an optimistic feeling, and I think Obama has caused a worldwide optimism to take hold. Let us hope it continues to grow, because if there is one thing that the world needs right now, it's optimism!
Happy House Hunting!
New deals set to save Wharf from ghost town future
New deals set to save Wharf from ghost town future
Nick Mathiason
guardian.co.uk, Sunday November 23 2008 00.01 GMT
The Observer, Sunday November 23 2008
As the number of bankers losing their jobs grows, there is speculation that Canary Wharf, the steel and glass east London office complex, will become a ghost town.
Dubbed Wall Street on the Water, Canary Wharf was the world's securitisation factory, the place where some of the arcane financial instruments that have destroyed the world's economy were devised.
Some real estate experts believe the controversial 14 million sq ft development, which received hundreds of millions of pounds of taxpayers' money, will once again suffer as the world financial crisis worsens.
But such talk could be misplaced. Canary Wharf, owned by a collection of tycoons including Paul Reichmann and Saudi Arabian prince Al-waleed Bin Talal, is 99.7 per cent let on leases, with an average 18.4 years unexpired.
Even the demise of Lehman Brothers, a key tenant, has been shrugged off. Canary Wharf is guaranteed to continue receiving rental income. If Lehman's new owner in London, Nomura, defaults on the lease, US insurance giant AIG, which itself received a £120bn US bail-out, will pay the rent for up to four years.
And last week, JP Morgan, the giant US bank, agreed to develop with Canary Wharf Group a 1.9 million sq ft office building in east London. The US giant spent £237m to buy the land.
In the next 18 months, the ranks of Canary Wharf's 92,000 workers will be swelled by KPMG, State Street and two other giant businesses, which will be renting a total of 1.3 million sq ft. And they could be joined by a host of other companies with huge space requirements. They include Deutsche Bank, Bloomberg and UBS.
Many believe that once Crossrail is built to Canary Wharf after the London Olympics, Docklands will no longer be a bankers' ghetto but fully integrated into the capital. To many the Wharf is the perfect encapsulation of Margaret Thatcher's economic vision. Temples to capitalism were built on the site of what at the turn of the 20th century were the world's most important docks.
And, as Canary Wharf has matured, new London office centres are being developed. The latest, behind King's Cross station, is receiving significant tenant interest. BNP Paribas is rumoured to be close to taking a building there and could be joined by fellow French bank Société Générale.
While trillions of pounds are lost in the global meltdown, London property bosses believe that Chinese and Indian banks will be the next to commit to the capital, ensuring it retains its global pre-eminence - though such talk seems like a pipe dream as the City braces for more job losses.
guardian.co.uk © Guardian News and Media Limited 2008
Nick Mathiason
guardian.co.uk, Sunday November 23 2008 00.01 GMT
The Observer, Sunday November 23 2008
As the number of bankers losing their jobs grows, there is speculation that Canary Wharf, the steel and glass east London office complex, will become a ghost town.
Dubbed Wall Street on the Water, Canary Wharf was the world's securitisation factory, the place where some of the arcane financial instruments that have destroyed the world's economy were devised.
Some real estate experts believe the controversial 14 million sq ft development, which received hundreds of millions of pounds of taxpayers' money, will once again suffer as the world financial crisis worsens.
But such talk could be misplaced. Canary Wharf, owned by a collection of tycoons including Paul Reichmann and Saudi Arabian prince Al-waleed Bin Talal, is 99.7 per cent let on leases, with an average 18.4 years unexpired.
Even the demise of Lehman Brothers, a key tenant, has been shrugged off. Canary Wharf is guaranteed to continue receiving rental income. If Lehman's new owner in London, Nomura, defaults on the lease, US insurance giant AIG, which itself received a £120bn US bail-out, will pay the rent for up to four years.
And last week, JP Morgan, the giant US bank, agreed to develop with Canary Wharf Group a 1.9 million sq ft office building in east London. The US giant spent £237m to buy the land.
In the next 18 months, the ranks of Canary Wharf's 92,000 workers will be swelled by KPMG, State Street and two other giant businesses, which will be renting a total of 1.3 million sq ft. And they could be joined by a host of other companies with huge space requirements. They include Deutsche Bank, Bloomberg and UBS.
Many believe that once Crossrail is built to Canary Wharf after the London Olympics, Docklands will no longer be a bankers' ghetto but fully integrated into the capital. To many the Wharf is the perfect encapsulation of Margaret Thatcher's economic vision. Temples to capitalism were built on the site of what at the turn of the 20th century were the world's most important docks.
And, as Canary Wharf has matured, new London office centres are being developed. The latest, behind King's Cross station, is receiving significant tenant interest. BNP Paribas is rumoured to be close to taking a building there and could be joined by fellow French bank Société Générale.
While trillions of pounds are lost in the global meltdown, London property bosses believe that Chinese and Indian banks will be the next to commit to the capital, ensuring it retains its global pre-eminence - though such talk seems like a pipe dream as the City braces for more job losses.
guardian.co.uk © Guardian News and Media Limited 2008
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