By Cees Bruggemans, Chief Economist FNB
20 April 2009
The year/year change in new car sales and building plans passed, critical leading indicators of our cyclical condition, have reached lows that now even surpass the 1985 bust (in its time the biggest recessionary condition since the 1920s and 1930s).
Technically it could still get worse, for while February 2009 was distorted negatively by a leap year in 2008, April 2009 will be marred by its Easter and general election holidays, deducting three working days compared to April a year ago.
But even without these distortiGoons, freefall in motor trade and building activity is reaching levels cyclically unprecedented in modern times (now pushing uncharted territory).
Even so, our fourth interest rate cut looms later this month. Thus the interest rate cycle is already well advanced after four months of cutting. Financial markets keep discounting a further 300 points of rate cuts ahead.
Even if this remaining cumulative 300 point cut isn’t delivered in full by the SARB, there will likely still be further lowering of rates, prime eyeing 11% by June 2009.
This should greatly further ease household affordability, reinforcing their ability to once again accelerate the replacement of credit-based durable goods such as cars, but also building activity.
On this score two more factors are important.
Firstly, crucially, global confidence needs be repaired more fully, focusing on banking and credit, but also on housing, equity and job markets, thereby probably also easing our household anxieties.
Though this repair process is highly technical, and surrounded by mysticism (and secretiveness) preventing many ordinary people from understanding what progress is actually made, financial markets have been positively voting with their feet.
Though much skepticism remains about many pitfalls, more is probably being achieved than meets the eye. Meanwhile, overseas households are still deleveraging debt by raising saving levels and businesses remain defensive by cutting inventories, investment plans and labour forces.
Secondly, however, overseas commentators keep suggesting global households actually stabilized their consumption spending during 1Q2009 (and by implication their savings behaviour) even as global industrial output was cut deeply below final sales.
Such front loading of business cutbacks allowed inventory levels first being contained in the face of lower sale prospects and then being reduced to emergency lows.
Perhaps as important as future sales growth expectations, global businesses acted to free up scarce capital while limiting new capital allocations to bare minimum.
Inventory ties up a lot of (dead) working capital while reduced growth prospects changes need for capex.
With bank credit access having become problematic and more costly due to spread widening (though contained by aggressive rate easing), the worldwide industrial collapse of late 2008 also reflected a major business attempt to reduce dependence on banks.
But if this is the bad news, and fully reflective of the banking crisis spillover into the real economy, the good news is that the larger part of this adjustment is apparently coming to an end.
The 4Q2008 and 1Q2009 were major adjustment quarters, with massive GDP declines, especially in large economies such as America, Japan and Germany, but also smaller ones such as Singapore, Korea and Taiwan.
But 2Q2009 is already evidencing a much slower pace of adjustment, at household, inventory and capex level.
By 3Q2009, America and China will probably lead the global revival as the inventory hit to industrial production ends and government stimuli gain importance.
Any renewed upturn in GDP will take place at very low levels of global resource utilization. Unemployment will only peak next year. Household balance sheet adjustment (deleveraging debt mainly through higher savings) will probably remain a drag on growth, as will lowered business capex, given reduced global activity prospects.
Yet there will also be major monetary and fiscal stimuli and though these cannot compensate fully for all the private adjustment, spending cuts were frontloaded, suggesting recovery rather than further sliding ahead.
Though South Africa suffers a fraction of the trauma inflicted on overseas economies by the banking crisis and its fallout, we certainly have incurred collateral damage, through widespread anxiety and the very real spillover into our industrial sectors as exports fell.
But eventually all cycles turn, especially when publicly boosted. Overseas, equity markets lead the charge (though still termed bear market rallies). US leading indicators have already for some time signaled a change of fortune being in the works.
In South Africa we have so far only a rising stock market doing the signaling. But with our main leading indicators sinking so extremely, yet with global repair and our own interest rate cycle now well advanced, we should see shortly more of our leading indicators signaling the coming turn.
Interest rates, equity prices, and leading indicators such as y/y change in car sales and new building plans have histories of signaling turning points in the economy by between six and twelve months ahead of time.
It makes 4Q2009 the quarter to watch for our next upturn.
Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics
Go to www.ipsinvest.com for more information
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Tuesday, April 21, 2009
Thursday, April 16, 2009
“Point of maximum pessimism” - now, gone or coming?
In August 2008 Scott Picken, CEO of International Property Solutions (IPS) presented at the Erwin Rode conference and a fellow presenter Dr Andrew Golding announced that he thought we were at the “Point of Maximum Pessimism” and that things were ready to improve. Unfortunately predicting the future is virtually impossible and no one knew what was about to hit us in September 08.
However Scott says he loves the saying. “It does not mean it is the bottom of the market, but it is the point where there seems to be no good news and things just seem to be getting worse. So my question to you, have we seen it, is it now or is it still to come. Many argue the worst is still to come, but I have a overwhelming belief that February was that point.” In February, there seemed to be no good news. Governments around the world had poured billions into their economies in an attempt to shore them up, but these policies were finding no traction. The stock markets had no confidence and continued to reach new lows and with property the confidence had evaporated and even those who wanted to take advantage of the opportunities could not raise finance, causing the markets to fall further! Interest rates were dropped to all time lows around the Western World and yet it was having no impact, as was common in economic theory, to boost the property market. It was all bad news and everyone sat around waiting and wondering, trying to determine how bad it would get.
And then amazing, almost as quickly as the world turned, March arrived and the good news started to come through. Firstly the government plans were authorised and implemented, the stock markets started to have to rally and even the concerns of a “dead cat bounce” were allayed as they started to improve. With property the huge interest rates started to take effect, and home buyers started to realise the great values of the property and with the increased affordability they decided now might be the time to get into the market. Investors alike started to look at the yields in comparison with the borrowing costs and realised that based on the income streams and the great discounts on value available, now was the time to get back into the market.
Australia was the first to rally. With a 63% drop in interest rates in 4 months and a First Time Home Owners Allowance of $21 000, the market actually moved to a state of “boom” in the affordable sector. On a recent trip to Australia in March, every single developer reported record sales and some even higher than in the peak of the boom in 2007. House builders have reportedly run out of land in cities like Melbourne as they cannot keep up with demand.
In USA in the last 3 weeks of March there was a 78% increase in mortgage applications – a sign of renewed interest in the housing market. The housing crisis which started in 2006 and led to the Credit Crunch, caused the rest of the world to go into a tail spin. As US house prices fell, leaving households much poorer, they were unable to buy the goods in other parts of the world. In the same way and improvement in the US housing activity could lay the foundation of a recovery in the global economy.
In the UK, things were dire in February. Property prices had fallen by more than 1% for eight consecutive month and there was hardly any finance available, with the man in the street only being able to borrow at 70% loan to values, making it virtually impossible to buy, no matter how good the opportunities looked. However according to Reuters and Nationwide, house prices rose for the first time since October 2007 in March. In February they dropped 1.9% and yet in March they rose 0.9% on the back of some confidence and more importantly as there is more access to finance. In the last 2 weeks we met with Lloyds TSB and they informed us they were actively back in the market to lend. The government is also putting pressure on Lloyds, Northern Rock and Royal Bank of Scotland to lend up to 90% which will get the wheels of the property market turning again. We have even noticed a large increase in demand and resulting sales from foreign investors, mainly from Hong Kong and South Africa, where they can get access to finance, understand the discounted values and the great positive income returns.
And then South Africa. Although allot slower to drop interest rates and many would argue to the detriment of the economy, the Reserve Bank has finally started to take measures dropping interest rates by 2.5% in the last 3 months. This will start to have an effect to property and has already been noticed with car sales. However 2.5% is only a 16% decrease and not the dramatic decreases as seen in other countries. Australia where interest rates have dropped from 8.75% to 3.25% since September 08 (5 months) a 63% reduction, USA has decreased from 5.25% (2006) 0% to 0.25%, a 95% reduction and the UK has decreased from 5.75% (July 07) to 0.5% now, a 87% reduction, the ECB from 4.25% (Oct 08) to 1.25% now and National Bank of Switzerland and the Bank of Japan have already reduced credit costs below 1 percent. There is talk that prime in South Africa will be between 10% and 11% by the end of the year which is another 3% or a reduction of 35% which will have a great impact on the South African property market, along with the feel good factor of the World Cup 2010, just more than a year away.
In conclusion, the only time you can call the bottom of the market is in hindsight. The best deals are where sellers are at a “point of maximum pessimism” and the question to ask is that is this pessimism starting to lift? I would say the time to act is now and not to wait another day or else you will be like one of the many who say, “I wish I had bought property in South Africa in 2001!”
However Scott says he loves the saying. “It does not mean it is the bottom of the market, but it is the point where there seems to be no good news and things just seem to be getting worse. So my question to you, have we seen it, is it now or is it still to come. Many argue the worst is still to come, but I have a overwhelming belief that February was that point.” In February, there seemed to be no good news. Governments around the world had poured billions into their economies in an attempt to shore them up, but these policies were finding no traction. The stock markets had no confidence and continued to reach new lows and with property the confidence had evaporated and even those who wanted to take advantage of the opportunities could not raise finance, causing the markets to fall further! Interest rates were dropped to all time lows around the Western World and yet it was having no impact, as was common in economic theory, to boost the property market. It was all bad news and everyone sat around waiting and wondering, trying to determine how bad it would get.
And then amazing, almost as quickly as the world turned, March arrived and the good news started to come through. Firstly the government plans were authorised and implemented, the stock markets started to have to rally and even the concerns of a “dead cat bounce” were allayed as they started to improve. With property the huge interest rates started to take effect, and home buyers started to realise the great values of the property and with the increased affordability they decided now might be the time to get into the market. Investors alike started to look at the yields in comparison with the borrowing costs and realised that based on the income streams and the great discounts on value available, now was the time to get back into the market.
Australia was the first to rally. With a 63% drop in interest rates in 4 months and a First Time Home Owners Allowance of $21 000, the market actually moved to a state of “boom” in the affordable sector. On a recent trip to Australia in March, every single developer reported record sales and some even higher than in the peak of the boom in 2007. House builders have reportedly run out of land in cities like Melbourne as they cannot keep up with demand.
In USA in the last 3 weeks of March there was a 78% increase in mortgage applications – a sign of renewed interest in the housing market. The housing crisis which started in 2006 and led to the Credit Crunch, caused the rest of the world to go into a tail spin. As US house prices fell, leaving households much poorer, they were unable to buy the goods in other parts of the world. In the same way and improvement in the US housing activity could lay the foundation of a recovery in the global economy.
In the UK, things were dire in February. Property prices had fallen by more than 1% for eight consecutive month and there was hardly any finance available, with the man in the street only being able to borrow at 70% loan to values, making it virtually impossible to buy, no matter how good the opportunities looked. However according to Reuters and Nationwide, house prices rose for the first time since October 2007 in March. In February they dropped 1.9% and yet in March they rose 0.9% on the back of some confidence and more importantly as there is more access to finance. In the last 2 weeks we met with Lloyds TSB and they informed us they were actively back in the market to lend. The government is also putting pressure on Lloyds, Northern Rock and Royal Bank of Scotland to lend up to 90% which will get the wheels of the property market turning again. We have even noticed a large increase in demand and resulting sales from foreign investors, mainly from Hong Kong and South Africa, where they can get access to finance, understand the discounted values and the great positive income returns.
And then South Africa. Although allot slower to drop interest rates and many would argue to the detriment of the economy, the Reserve Bank has finally started to take measures dropping interest rates by 2.5% in the last 3 months. This will start to have an effect to property and has already been noticed with car sales. However 2.5% is only a 16% decrease and not the dramatic decreases as seen in other countries. Australia where interest rates have dropped from 8.75% to 3.25% since September 08 (5 months) a 63% reduction, USA has decreased from 5.25% (2006) 0% to 0.25%, a 95% reduction and the UK has decreased from 5.75% (July 07) to 0.5% now, a 87% reduction, the ECB from 4.25% (Oct 08) to 1.25% now and National Bank of Switzerland and the Bank of Japan have already reduced credit costs below 1 percent. There is talk that prime in South Africa will be between 10% and 11% by the end of the year which is another 3% or a reduction of 35% which will have a great impact on the South African property market, along with the feel good factor of the World Cup 2010, just more than a year away.
In conclusion, the only time you can call the bottom of the market is in hindsight. The best deals are where sellers are at a “point of maximum pessimism” and the question to ask is that is this pessimism starting to lift? I would say the time to act is now and not to wait another day or else you will be like one of the many who say, “I wish I had bought property in South Africa in 2001!”
How to guarantee you Offshore Positive Income Cashflow?
Australia is one of the most progressive, politically and economically stable economies in the world. It is also the first country to have shown signs of coming through the Global Financial Crisis and provides an excellent opportunity for a South African looking for a foreign investment with a positive cashflow, an offshore insurance policy and a Rand Hedge.
Imagine being able to invest where you can fix you income, fix your expenses and make sure you are investing in areas with the best capital growth prospects.
In property there are only three variables you need to focus on:
• Your income,
• Your expenses, and
• Your capital growth.
International Property Solutions (IPS) has found a way to fix the first two in Australia and ensure a cashflow positive income, along with ensuring the properties are in the areas with the most potential for growth.
How do you fix your income?
IPS has partnered with Oz Invest a company which was started in 1987 to help Australian Defense Force people invest in Australian property. Whether they are on a boat in the Mediterranean or in a tent in Afghanistan there sailors or soldiers have an end to end solution. The first problem their clients faced was the management and maintenance. They therefore created their own management company and will make sure they management and maintenance of the property is taken care of. The second major issue was what happens if the tenant doesn’t pay, or pays late and you don’t live nearby. They designed their 10 Year Leaseback Guarantee. Basically Oz Invest rent the property from the property owner and they guarantee a market related rental will be paid on the 10th of every month, whether there is a tenant in the property or if the tenant pays late – it is not your problem! Your income is guaranteed! Many people ask, “This sounds too good to be true, how does it work?” Basically they have over 1000 units under management and they charge each client $15 a week, which is a kitty of $15 000 a week. With their own very efficient management company and with vacancies of less than 1%, they tend to only have between 4 and 8 properties unlet, this kitty money can be used to pay for these unlet properties. They use economies of scale to ensure this profit and is the reason they like to extent it after the 10 years. There are also no penalties should the client want to cancel before the 10 years is up as they want to sell the property or go and live in the house.
This is not a developer who is giving you a rental guarantee, overcharging you for the property and then paying you back your money over a couple of years. This is a win win strategy which provides the ideal solution for a property investor, particularly if you are based internationally.
There is also another very important understanding. In the normal situation a developer sells you a property and although they often give indications of the intended rentals, once you take the keys they take their profit and it is the buyers problem to let the property. With Oz Invest you sign a legal lease agreement with them before you buy the property and therefore they put their money where their mouth is. If you buy in an area where they can’t let it out – it costs them money. It is a magnificent safety net to ensure they are doing their research as to the best areas and helping IPS clients invest in these areas.
This is the perfect system and ensures your income is guaranteed for 10 years and beyond!
How do I fix my costs?
In Australia you can fix your mortgage for 5 or 10 years. The interest rates have come done by 64% in the last 5 months and are starting to reach the bottom of the curve. It provides a great opportunity to fix your mortgage costs and ensure that your property is cashflow positive from day one.
How do I ensure I am buying in the areas with the best growth opportunities?
As explained above Oz Invest put their money where their mouth is. Richard Dunn is the full time acquisitions manager and it is his mandate to ensure that he is finding the best investments in Australia, in areas with the best rental demand and the best capital growth. Examples of this are they don’t focus on Perth as the property market has dropped there and is expected to drop further. They don’t focus on Sydney as the prices are high and rentals are not comparable and therefore the yields are lower. They don’t focus on cities where the fundamentals of infrastructure growth and population growth do not indicate long term growth trends, cities like Adelaide and Canberra. And finally they don’t do apartments as they do not rent as well houses, as the average Australian family wants to rent a 3 or 4 bedroom Australian home.
They are constantly researching these markets, but at the moment the best opportunities are in Brisbane and Melbourne and even specific market segments and growth corridors in these cities. IPS along with Oz Invest has done R1.5 million worth of research in the last 6 months to ensure that each IPS client is given the best advice as where to get the best returns on their money!
Conclusion
There are three very important things to consider with property in Australia. Scott Picken, CEO of IPS says:
Firstly, “Buying property in Australia prior to relocating has huge advantages for tax, immigration, credit ratings and ultimately buying your dream home.”
Secondly, “I think it is imperative to understand how important this investment is to you and your families future. More than 90% of middle to upper income families in Argentina, Russia and Zimbabwe were directly and materially affected when their currency fluctuated. The only ones who didn’t were the prudent ones who had diversified their assets and invested offshore in other currencies.
Thirdly, “Before you invest there are 3 fundamentals which you should know and are essential. You should not invest without this knowledge. We will teach you these first.”
Go to www.ipsinvest.com for more information.
Imagine being able to invest where you can fix you income, fix your expenses and make sure you are investing in areas with the best capital growth prospects.
In property there are only three variables you need to focus on:
• Your income,
• Your expenses, and
• Your capital growth.
International Property Solutions (IPS) has found a way to fix the first two in Australia and ensure a cashflow positive income, along with ensuring the properties are in the areas with the most potential for growth.
How do you fix your income?
IPS has partnered with Oz Invest a company which was started in 1987 to help Australian Defense Force people invest in Australian property. Whether they are on a boat in the Mediterranean or in a tent in Afghanistan there sailors or soldiers have an end to end solution. The first problem their clients faced was the management and maintenance. They therefore created their own management company and will make sure they management and maintenance of the property is taken care of. The second major issue was what happens if the tenant doesn’t pay, or pays late and you don’t live nearby. They designed their 10 Year Leaseback Guarantee. Basically Oz Invest rent the property from the property owner and they guarantee a market related rental will be paid on the 10th of every month, whether there is a tenant in the property or if the tenant pays late – it is not your problem! Your income is guaranteed! Many people ask, “This sounds too good to be true, how does it work?” Basically they have over 1000 units under management and they charge each client $15 a week, which is a kitty of $15 000 a week. With their own very efficient management company and with vacancies of less than 1%, they tend to only have between 4 and 8 properties unlet, this kitty money can be used to pay for these unlet properties. They use economies of scale to ensure this profit and is the reason they like to extent it after the 10 years. There are also no penalties should the client want to cancel before the 10 years is up as they want to sell the property or go and live in the house.
This is not a developer who is giving you a rental guarantee, overcharging you for the property and then paying you back your money over a couple of years. This is a win win strategy which provides the ideal solution for a property investor, particularly if you are based internationally.
There is also another very important understanding. In the normal situation a developer sells you a property and although they often give indications of the intended rentals, once you take the keys they take their profit and it is the buyers problem to let the property. With Oz Invest you sign a legal lease agreement with them before you buy the property and therefore they put their money where their mouth is. If you buy in an area where they can’t let it out – it costs them money. It is a magnificent safety net to ensure they are doing their research as to the best areas and helping IPS clients invest in these areas.
This is the perfect system and ensures your income is guaranteed for 10 years and beyond!
How do I fix my costs?
In Australia you can fix your mortgage for 5 or 10 years. The interest rates have come done by 64% in the last 5 months and are starting to reach the bottom of the curve. It provides a great opportunity to fix your mortgage costs and ensure that your property is cashflow positive from day one.
How do I ensure I am buying in the areas with the best growth opportunities?
As explained above Oz Invest put their money where their mouth is. Richard Dunn is the full time acquisitions manager and it is his mandate to ensure that he is finding the best investments in Australia, in areas with the best rental demand and the best capital growth. Examples of this are they don’t focus on Perth as the property market has dropped there and is expected to drop further. They don’t focus on Sydney as the prices are high and rentals are not comparable and therefore the yields are lower. They don’t focus on cities where the fundamentals of infrastructure growth and population growth do not indicate long term growth trends, cities like Adelaide and Canberra. And finally they don’t do apartments as they do not rent as well houses, as the average Australian family wants to rent a 3 or 4 bedroom Australian home.
They are constantly researching these markets, but at the moment the best opportunities are in Brisbane and Melbourne and even specific market segments and growth corridors in these cities. IPS along with Oz Invest has done R1.5 million worth of research in the last 6 months to ensure that each IPS client is given the best advice as where to get the best returns on their money!
Conclusion
There are three very important things to consider with property in Australia. Scott Picken, CEO of IPS says:
Firstly, “Buying property in Australia prior to relocating has huge advantages for tax, immigration, credit ratings and ultimately buying your dream home.”
Secondly, “I think it is imperative to understand how important this investment is to you and your families future. More than 90% of middle to upper income families in Argentina, Russia and Zimbabwe were directly and materially affected when their currency fluctuated. The only ones who didn’t were the prudent ones who had diversified their assets and invested offshore in other currencies.
Thirdly, “Before you invest there are 3 fundamentals which you should know and are essential. You should not invest without this knowledge. We will teach you these first.”
Go to www.ipsinvest.com for more information.
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