South African construction industry bears the brunt of food price inflation

South African Construction Industry Bears the Brunt of Food Price Inflation

South Africa’s construction industry, one of the economy’s main growth drivers, was taking the strain from the “seemingly uncontrollable” rise in food inflation, an industry think tank said on Wednesday.

Industry Insight said that approved residential building plans, which was an indication of the pipeline construction activity, has slowed to a negative growth rate of 2,7% in 2007. In 2006, the growth rate was 8,6% year-on-year.

“Townhouse development has already decreased by 7,5% year-on-year in July 2007. Should this trend continue, we could expect to see an increase in liquidations and subsequent job losses,” the organisation said.

Consumer price inflation, excluding mortgage interest rate (CPIX) had slowed to 6,3% year-on-year in July, and Industry Insight said that, although it was regarded as good news, consumers still faced exceptionally high food prices, as CPIX continued to exceed the 6% target range.

“In 2002 food inflation rose to levels beyond 20% before recovering to less that 2% in 2004. During this time various investigations were commissioned into food prices and competitive practices in the food industry. Interest rates were mainly applied to contain CPIX, excluding food, which, at that time, had increased to a peak of 8,8% in November 2002,” the organisation said.

It added that CPIX, excluding food, had not bridged the 6% target since the end of 2003.

“The question now remains whether it is fair to affected parties such as the construction industry to apply another rate hike in an attempt to contain the impact of seemingly uncontrollable rising food inflation considering that gross domestic product growth has started to slow from 5,2% in 2006 to 4,5% in the second quarter of this year.”

Industry Insight suggested that food prices come under scrutiny, rather than raising interest rates, which would result in the deterioration of economic growth, weaker investment in particularly housing and potential job losses in the construction industry.

Authored By: Mariaan Olivier
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Downward trend in South African property price growth continues

Downward Trend in South African Property Price Growth Continues

According to the latest Absa House Price Index, the average price of middle-segment housing (see explanatory notes) increased by a nominal 14,2% year-on-year to R950 000 in September 2007 (14,8% in August). In the first nine months of the year, nominal house price growth averaged 15,3% compared with the same period last year.

Real year-on-year growth in house prices of 7,6% was registered in August, unchanged from July. In the first eight months of 2007, real growth in house prices averaged 8,3% year-on-year. The real growth rate is based on the headline consumer price index (CPI). On a month-on-month basis, nominal house price growth slowed to 0,6% in September (0,8% in August). In real terms, house prices increased by 0,3% month-on-month in August
after a drop of just 0,1% in July.

Domestic inflationary pressures eased somewhat in August, with year-on-year (y/y) CPIX inflation marginally lower at 6,3% from 6,5% in July. Producer price inflation (PPI) eased from 10,3% y/y in July to 9,4% in August, mainly as a result of a significantly lower inflation rate recorded in the domestic component of the PPI.

Although the latest inflation numbers appear to be positive for the interest rate outlook, both PPI and CPIX inflation remain under upward pressure from rising food and energy prices. Against this background, and also taking into account above-inflation wage increases recently negotiated in various sectors of the economy, inflation expectations will remain relatively high over the short term.

The Reserve Bank’s Monetary Policy Committee (MPC) meets again next week (10 and 11 October) to decide on the future course for interest rates. The view with regard to keeping rates either stable or hiking further is currently evenly balanced. While CPIX inflation is expected to remain above 6% for some time, the MPC may well decide to keep rates unchanged next week on the back of slowing domestic demand and credit extension. The full effect of previous interest rate hikes and the implementation of the National Credit Act is still to work through to the economy, which may prompt a pause in rates.

The growth in house prices is expected to taper off further towards the end of the year, with average growth for the full year now projected at a level of around 14,5%. Nominal house price growth for next year is forecast at about 10%, mainly as a result of the tightening monetary conditions since mid-2006, as well as slower economic growth expected in the second half of this year and in 2008.

Authored by: Jacques du Toit
Published by: Absa Group Economic Research

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Johannesburg’s new gold belt

Johannesburg’s New Gold Belt

Whether you love or hate the idea of the vastly expensive Gautrain that’s set to cut through the nation’s busiest region, don’t ignore it from a property perspective. Land and property along the Gautrain route is set to become South Africa’s “new gold”. That is the forecast from John Loos, property strategist, in the FNB Commercial Property Finance market update for the third quarter. He said he believes mounting congestion “will limit the pace of both urban sprawl and the de-centralisation of commercial activity, and promote densification of prime existing locations”.

Traffic will continue to slow even out of peak hours, making it “far more difficult” to move around for business purposes. The result, said Loos, is that people should move closer to the commercial action and places of employment as well as to good transport infrastructure. This should lead to “an increasing amount of office location decisions” made on the same basis.

“I am of the view that the land/space along the new Gautrain route will become SA’s new gold, and we are already seeing investors respond logically, with recent announcements of high density office and residential developments in the likes of Rosebank.” Loos said Johannesburg residents can expect more of the same to follow. Many old buildings as well as office parks have insufficient parking. Loos said it looks as if the “parking constraint will deteriorate further”. Owners of well-placed parking garages could achieve some of the highest commercial property returns in the coming years, he said.

“All ships on a rising tide’ is probably an appropriate phrase at the present time of low vacancy rates. But their performance may not keep up with the nodes along the Gautrain corridor over the longer term,” he said of areas “away from the main decentralised action”. This is because the Gautrain “will provide a valuable high-quality public transport service at a time when commuting (and intra-day business travel) is becoming increasingly time-consuming and problematic”.

Authored By: Moneyweb, September 10, 2007

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Developers to bend the knee to middle and low-income buyers

Property Developers to Bend the Knee to Middle and Low-income Buyers

Low to middle income home buyers often ignored by developers in the mid 2000s boom period in terms of their housing needs are about to be given a fair hearing. In fact it’s likely that developers, at least the wiser ones, will be falling over themselves to meet the lower market segments every need, according to a prominent home loan expert who believes property related stakeholders can no longer ride on higher house prices to balance the books.

“Volume, not value,” was cited repeatedly by Marsha Haupt, national sales manager of mortgage originator Better Bond, as she urged home loan consultants at a recent convention in Johannesburg to increase their market activities. As the average household debt of 73 percent nudges its highest levels ever and upward pressure continues on interest rates, Haupt says the lower house price growth will be driven by affordability levels. Haupt strongly advises developers to keep a weather eye on oil price trends, domestic fuel and food prices and the rand exchange rate in their forward planning. All of which, she believes, will be strongly inter-woven in the house purchasing trends into the next year. Even so, Haupt is cautiously optimistic of a house price growth of around 13,1 percent (7,2 percent real) for the year over that of 2006.

Assuming developers will respond to the burning issue of affordability, either through building smaller units, lower price finishes and higher densities she sees this having a positive effect in stabilising selling prices in the second hand market. Her view is based on the current price differential between new and existing houses, which in the first quarter of this year was only 2,3 percent, or R21 800 more than an average size house. Far off the cry of the 31,1 percent, or R173 100 differential between new and existing recorded in the first quarter of 2003.

Given that the banks are still lending up to 108 percent on the purchase price of a new unit and transfer costs are included in the selling price Haupt says existing homes, unless representing good market value for money, could find themselves sitting. The situation could be further exacerbated by increases in second hand stock, which are already in over supply.

Published By: Rodney Hayter, September 5, 2007

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