Downward Pressure on Households

Property and mortgage industry players should be concerned by last week's downgrade in South Africa's sovereign credit ratings by Fitch and Standard & Poor's lowering its outlook from stable to negative.

John Loos, a household and property sector strategist at FNB, said these changes would contribute to further potential weakness in net investor capital flows required to balance South Africa's gaping current account deficit on its balance of payments.

Loos said if South Africa did not receive those capital flows in such abundance as in the past, it simply implied the country would have to narrow that current account deficit, which "more or less" meant lowering gross domestic expenditure more into line with national income and the country living more within its means.

He said the move towards curbing "excesses" as a nation were growth negative in the short term, which in turn exerted downward pressure on household disposable income growth, the purchasing power for residential property.

"On the commercial property side, it goes without saying that less economic growth implies less growth in demand for commercial space," he said.

The Reserve Bank was effectively helping the country to live within its means by gradually raising interest rates.

He said not only were both the domestic economic data releases and Fitch downgrade last week potentially capital flow negative, but the good US employment data report was also significant.

"Given the US Federal Reserve's focus on labour market tightness, this increases the likelihood of the start of US interest rate hiking later in the month. For South Africa, that may be a further negative for our net capital flows as the US would become slightly more attractive for a portion of global capital flows," he said.

But Loos stressed that last week's economic news was not all bad for the South African economy and its household sector.

He said there were fears of a possible decision by Opec meeting to rein in production levels and drive oil prices higher, but this did not materialise.

This was likely to keep global oil prices depressed and contain what at times could be a major source of inflation in South Africa.

"The likelihood of ongoing subdued global oil prices suggests that CPI's acceleration can remain modest, allowing the Reserve Bank to continue to lift interest rates at the current 'snail's' pace.

"For the highly interest rate sensitive residential property market, that's the good news. While it can't escape economic and household income growth weakness, if the Reserve Bank's pace of interest rate hiking can remain at this currently very slow pace, the 'soft landing' scenario for the residential market remained the likely one for the time being," he said.

Meanwhile, Absa reported this week that month-on-month house price growth subsided to a virtually negligible level of less than 0.1 percent in November and was contributing to the declining trend in year-onyear house price growth.

It said year-on-year growth in the average nominal value of homes in the middle segment of the domestic housing market slowed down further to 4.2 percent last month from 4.6 percent in October

Article courtesy of Business Report