Residential property gauge Residential property showing resilience

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					Residential property gauge Residential property showing resilience
Standard Bank’ median house price1 index recorded a relatively firm growth rate of s 10.2% y/y in October. This is a noticeable improvement on the single-digit house price inflation recorded in the previous two months. The Standard Bank median house price had recorded a year-on-year growth rate of 5.7% during both August and September. The underlying momentum in residential property prices, as measured by the five-month moving average growth rate, was recorded at 10.1% y/y in October. Formulating a firm view on the residential property market over the last few months has been made difficult by distortions in the data. Notwithstanding the increased volatility in the house price data over the last few months, we have maintained a view that the underlying macroeconomic environment remains strong and will make a soft landing in the property market (single-digit growth over the next few months) the most likely outcome. In this report we analyse the macroeconomic drivers of the residential property market to substantiate our view. Perceptions of the residential property market have become negative in the recent past. This cautiousness has been induced by concerns over the increased burden of accessing mortgage finance due to the National Credit Act (NCA) and the restraining effects of higher interest rates on the affordability of housing. Nonetheless, the underlying South African macroeconomic environment remains benign. Keeping the volatility inherent in the data in mind, the relatively strong growth in house prices seen in October and the resilience in house price inflation witnessed over the last few months should be viewed in the context of the resilient underlying macroeconomic conditions. The economy grew at a solid rate of 4.5% in the second quarter of 2007. Employment data released by Statistics South Africa (StatsSA) in its Quarterly Employment Statistics (QES) for the second quarter showed that employment in all non-agricultural industries increased by 53,000 or 0.6% q/q during the second quarter of 2007 following an increase of 0.3% q/q in the first quarter. The South African Reserve Bank (SARB) reported that real disposable income of households increased by 7.5% on a seasonally adjusted and annualised rate. This was the fastest rate of growth of real disposable income in eight years. Robust economic, employment, and real disposable income growth has fuelled resilience in household consumer spending, which grew by 7.1% y/y during the second quarter of 2007.

1 November 2007

Figure 1: House prices – Standard Bank
40 30 20 10 0 -10 1998 1999 2000 20012002 2003 2004 2005 2006 2007 Standard Bank property price grow th 5-month moving average % y/y

Source: Standard Bank Group

Table 1: Stats at a glance
Indicator
Median house price Median house price Median house price Mortgage advances Private sector credit extension Ratio of household debt to income Prime rate

Period
Oct 07 5m ma Oct 07 Sep 07 Sep 07 Q2 07

Data
10.2% y/y 10.1% y/y R595 000 26.1% y/y 22.46% y/y 76.6%

Oct 07

14.0%

Source: Standard Bank Group, SARB

1

The median price is the price such that half of all houses are more expensive and half are less expensive than that price.

Sizwe Nxedlana

((+27 11) 631-2018 Important disclaimer – please refer to back page Standard Bank Group Economics

* Sizwe.Nxedlana@standardbank.co.za

Standard Bank Group Economics Standard Bank Group Economics

Figure 2: Growth in household real disposable income and household consumption expenditure
10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 HCE %yy
Source: SARB

%yy

Growth in real disposable income of households saar

A survey of consumer sentiment released more recently in the third quarter concurs with the continued strength reflected in the macroeconomic data and indicates that consumer sentiment remained positive in the third quarter of 2007. The FNB/BER consumer confidence index moderated to 18 in the third quarter from 21 in the second quarter. At 18 points consumer confidence remains relatively high and is not too far from the historic high of 23 reached during the first quarter of 2007. The survey also indicated that consumers’ 12-month expectations regarding the overall economy and their own household financial position remained upbeat. Even more encouraging for the residential property market was the fact that consumers’ rating of the present time to buy durable goods remained high (see Figure 3). This is despite the fact that the survey was conducted at a time that incorporated the June and August rate hikes, the continued breach of the Reserve Bank’ inflation target, and the turmoil in s international credit markets, inter alia. One would have expected a deterioration in the rating of the present time to buy durables’component of the consumer confidence survey under such conditions. Thus, strong macroeconomic fundamentals, in the main healthy real income growth, seem to be providing some support for consumer spending and, to a lesser extent, for housing demand and house prices.

Figure 3: Consumer confidence and rating of the present time to buy durables
30 20 10 0 -10 -20 -30 2000 2001 2002 2003 2004 2005 2006 2007 Net balance

Consumer Confidence (net balance) Rating of present time to buy durables (net balance)
Source: FNB/BER

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Standard Bank Group Economics

However, the caveat to the relatively healthy state of the macroeconomic environment described above, in relation to the residential property market, is the negative effect that higher interest rates will increasingly inject into the affordability of residential property. Following the pause in monetary policy tightening at the February and April MPC (Monetary Policy Committee) meetings, the SARB hiked its key repo rate at the June, August and October meetings. This has left the repo rate at 10.5% and the prime interest rate at 14% as of October 2007. As a result of this, the cost of money is now 12% higher than at the beginning of the year and 33% higher than when interest rates were at their lowest in June 2006. The prime interest rate was 10.5% at that time.

Table 2: Estimated mortgage instalments at different rates of prime
Loan amount Rand 100,000 200,000 300,000 400,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 Prime rate 10.5% Monthly instalment 998 1,997 2,995 3,994 4,992 7,488 9,984 12,480 14,976 17,472 19,968 Required income 3,328 6,656 9,984 13,312 16,640 24,960 33,280 41,601 49,921 58,241 66,561 Prime rate 12% Monthly instalment 1,101 2,202 3,303 4,404 5,505 8,258 11,011 13,764 16,516 19,269 22,022 Required income 3,670 7,341 11,011 14,682 18,352 27,528 36,704 45,880 55,056 64,232 73,408 Prime rate 14% Monthly instalment 1,244 2,487 3,731 4,974 6,218 9,326 12,435 15,544 18,653 21,762 Required income 4,145 8,290 12,436 16,581 20,726 31,089 41,452 51,815 62,178 72,541 Increase in monthly instalment 245 490 735 981 1,226 1,839 2,451 3,064 3,677 4,290

24,870 82,904 4,903 Source: Standard Bank Group

Table 2 shows estimates of monthly mortgage instalments required at different levels of the prime interest rate. The bold column shows the difference in monthly mortgage instalments when prime was 10.5% and at the current rate of 14%. Clearly the higher interest rates have had a marked effect on the affordability of residential property as shown by the large increase in the cost of servicing a mortgage. The income required to qualify for a particular house price segment has also increased. This reduced affordability will tend to decrease the demand for residential property by consumers and may lead to a moderation in the growth of house prices. Furthermore, the interest rate-induced deterioration in housing affordability has occurred in an environment of high absolute levels of household indebtedness. Data for the second quarter (the most recent) showed that the ratio of household debt to disposable income was 76.6%, a historic high, while the debt repayment to disposable income ratio was estimated at 11.8% in the same period.

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Standard Bank Group Economics Standard Bank Group Economics

Figure 4: Household debt to disposable income ratio and household debt repayment to disposable income ratio
80 70 60 50 40 30 20 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
Household debt to disposable income % (LHS) Household debt repayment to disposable income percentage points %
Source: SARB and Standard Bank Group

%

16 14 12 10 8 6 4

The higher rates of interest, coupled with the increased processing rigour surrounding the NCA, should result in moderation in the demand for residential property and in house price inflation. Furthermore, the increased gearing of higher income groups should make them vulnerable to the higher interest rate environment, which should make the interest rate-sensitive portion of the higher priced housing segment particularly vulnerable. However, as we have already argued, the macroeconomic environment remains supportive of consumer spending and of the residential property market. In our view, the resilient setting provides a powerful countervailing force and, despite tighter monetary policy, renders a soft landing in the residential property market the most likely outcome. We expect growth more or less in the 5% to 10% range until the second half of 2008. Thereafter, we expect moderately higher house price inflation on the basis of our forecast of monetary policy easing, which we expect could commence early in the second half of 2008. Bottom line: The current high level of interest rates in an environment of high consumer indebtedness will tend to cause a moderation in the demand for residential property and therefore lead to moderation in house price inflation. However, notwithstanding the volatility in the house price data, the relatively strong growth of 10.2% y/y recorded in Standard Bank’ median house price in October is not at odds s with the resilient underlying macroeconomic conditions. Important macroeconomic support remains for consumer spending and for the residential property market. We maintain our view of a soft landing in the residential property market, with an expectation for growth in the 5% to 10% range until the second half of 2008. Thereafter we anticipate improvement in house price inflation on the basis of our forecast of monetary policy easing, which we expect could commence during the second half of 2008.

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Standard Bank Group Economics

Standard Bank house price data 2000
January February March April May June July August September October November December Average 8.3 5.3 11.1 11.1 4.4 -2.5 2.6 0.7 2.6 7.7 10.5 9.0 5.9

2001
12.8 17.5 15.0 10.0 8.1 15.7 15.0 16.2 15.0 14.3 16.8 21.4 14.8

2002
13.6 6.4 8.7 15.9 18.2 15.2 8.7 11.1 13.0 8.3 8.3 4.0 11.0

2003
8.0 12.0 14.0 9.8 11.5 13.5 20.0 15.4 15.4 19.2 25.0 26.9 15.9

2004
29.6 28.6 26.3 32.1 31.0 33.9 33.3 34.0 33.4 35.5 32.3 33.3 31.9

2005
28.6 25.1 30.6 29.7 26.3 24.1 25.0 24.4 28.8 19.0 16.3 17.5 24.6

2006
18.5 16.6 13.8 12.5 12.5 6.5 6.0 6.0 2.9 8.0 8.0 6.4 9.8

2007
6.9 8.6 8.4 7.4 10.9 18.8 10.4 5.7 5.7 10.2

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Standard Bank Group Economics Standard Bank Group Economics

Picture Gallery
Figure 1: Buildings: Flats & townhouses
150 100 50 0 -50 -100 96 97 98 99 00 01 02 03 04 05 06 07 Completed Passed
Source: StatsSA

Figure 2: Private sector borrowing
40 30 20 10 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Private sector credit extension Mortgage advances
Source: SARB

% y/y, 6m ma

% y/y

Figure 3: Building cost: Building and construction
% y/y

Figure 4: Building cost: Building industries and civil engineering
20 16 12 8 4 0 96 97 98 99 00 01 02 03 04 05 06 07 Building industries Civil engineering
Source: SARB

20 16 12 8 4 0

% y/y

96 97 98 99 00 01 02 03 04 05 06 07
Source: StatsSA

Figure 5: Prime interest rate
18 16 14 12 10 2003 %

Figure 6: Debt affordability vs insolvencies
16 14 12 10 8 6 1995 1997 1999 2001 2003 2005 2007 % Number 2000 1600 1200 800 400 0 Debt repayment to income ratio Insolvencies (RHS)
Source: StatsSA, Standard Bank Group

2004

2005

2006

2007

2008

Source: SARB, Standard Bank Group

Note on the methodology used in calculating Standard Bank’ house price index s
The way in which house prices are measured means that they are inherently volatile, not unlike many other economic indicators. Measuring house prices is complicated by the fact that the available data usually stem from the properties sold during a particular period, rather than from a well-designed sample that is representative of all houses. This is aggravated by the heterogeneity of houses. Changes in the measured prices may be the result of actual changes in the general price level; or changes in the distribution of the houses being sold, for example more sales of luxury houses may push up the measured house prices even without changes in general prices; or the changes may simply be random. Given these data challenges, the international best practice is to use the median or middle price, rather than, say, the average house price. The median is the price such that half of all houses are more expensive and half less expensive than that price. It is substantially less volatile and less sensitive to the typical problems found in house price data. Standard Bank’ data are s therefore based on the median house price of the full spectrum of houses. Furthermore, national data from the Deeds Office are available only with a relatively long lag of up to nine months, so data from Standard Bank, which has a market share of about 27.7%, and whose data are generally highly correlated with those of the Deeds Office, are a good proxy for the national market.

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Standard Bank Group Economics

Group Economics
Goolam Ballim – Group Economist +27-11-636-2910 goolam.ballim@standardbank.co.za

South Africa
Johan Botha +27-11-636-2463 Johan.botha2@standardbank.co.za Shireen Darmalingam Danelee van Dyk +27-11-636-2905 +27-11-636-6242 Shireen.darmalingam@standardbank.co.za Danelee.vanDyk@standardbank.co.za Sizwe Nxedlana +27-11-631-2018 Sizwe.Nxedlana@standardbank.co.za

Rest of Africa
Jan Duvenage +27-11-636-4557 Jan.duvenage@standardbank.co.za Botswana Lesotho Namibia Swaziland Anita Last +27-11-631-5990 Anita.last@standardbank.co.za Angola Ghana Malawi Mauritius Yvonne Mhango +27-11-631-2190 Yvonne.Mhango@standardbank.co.za Kenya Mozambique Uganda Zambia Victor Munyama +27 11-631-1279 Victor.Munyama@standardbank.co.za DRC Nigeria Tanzania Zimbabwe

Kindly email brenda.landsberg@standardbank.co.za should you wish to be included on our research distribution list. Do visit our web site http://www.standardbank.co.za and select “ Research”to view our publications.

Home loans
Leon Barnard – Director +27-11-636-0247 leon.barnard@standardbank.co.za Lasath Punyadeera +27-11-636-1292 Lasath.punyadeera@standardbank.co.za

Kindly email brenda.landsberg@standardbank.co.za should you wish to be included on our research distribution list. Do visit our web site http://www.standardbank.co.za and select “ Research”to view our publications.

Analyst certification The authors certify that: 1) all recommendations and views detailed in this document reflect his/her personal opinion of the financial instrument or market class discussed; and 2) no part of his/her compensation was, is, nor will be, directly (nor indirectly) related to opinion(s) or recommendation(s) expressed in this document Disclaimer This document does not constitute an offer, or the solicitation of an offer for the sale or purchase of any investment or security. This is a commercial communication. If you are in any doubt about the contents of this document or the investment to which this document relates you should consult a person who specialises in advising on the acquisition of such securities. Whilst every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and no responsibility or liability is accepted by the Standard Bank Group Limited, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of the information contained herein. All opinions and estimates contained in this report may be changed after publication at any time without notice. Members of the Standard Bank Group Limited, their directors, officers and employees may have a long or short position in currencies or securities mentioned in this report or related investments, and may add to, dispose of or effect transactions in such currencies, securities or investments for their own account and may perform or seek to perform advisory or banking services in relation thereto. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. This document is not intended for the use of private customers. This document must not be acted on or relied on by persons who are private customers. Any investment or investment activity to which this document relates is only available to persons other than private customers and will be engaged in only with such persons. In European Union countries this document has been issued to persons who are investment professionals (or equivalent) in their home jurisdictions. Neither this document nor any copy of it nor any statement herein may be taken or transmitted into the United States or distributed, directly or indirectly, in the United States or to any U.S. person except where those U.S. persons are, or are believed to be, qualified institutions acting in their capacity as holders of fiduciary accounts for the benefit or account of non U.S. persons; The distribution of this document and the offering, sale and delivery of securities in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by the Standard Bank Group Limited to inform themselves about and to observe any such restrictions. You are to rely on your own independent appraisal of and investigations into (a) the condition, creditworthiness, affairs, status and nature of any issuer or obligor referred to and (b) all other matters and things contemplated by this document. This document has been sent to you for your information and may not be reproduced or redistributed to any other person. By accepting this document, you agree to be bound by the foregoing limitations. Unauthorised use or disclosure of this document is strictly prohibited. Copyright 2004 Standard Bank Group. All rights reserved.

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Description: Residential property gauge Residential property showing resilience