Bugle Sales Talk Editorial

Real house prices peaked in 2007/8 and the current real house price levels remain only marginally below these levels, kept there by low interest rates and large Current Account deficits. A country's Current Account on the Balance of Payments is the difference between its imports and exports. If Imports exceed exports, the only way a country is able to pay for this deficit is through foreign capital inflows on its capital account. A current account deficit can be seen as reflecting a country's Gross Domestic Expenditure being in excess of its National Income. This difference reflects a country living beyond its means, and can be done for a period but is not easily sustainable. The story of the early-1980's residential property price boom is instructive.

With low interest rates and the strong economic growth as a result of the commodity price boom at the time, the residential property market surged with the Absa House Price Index recording growth of 23.8% in 1980 and its highest ever annual inflation of 38.3% in 1981. However the slide in commodity prices, notably Gold, had already started at that stage and by 1982 the IMF Global Metals Price Index was -39% down from its 1979 peak. Although oil prices also slumped at the time this did not help us as the prices of our export commodities were also dramatically down.

With our National Income down sharply in 1981 due to the collapse in the Gold price our current account deficit rocketed to -6% of GDP in the same year. Capital inflows were not sufficient to finance this deficit and the Real Trade Weighted Rand exchange rate fell by - 48.5% between the 3rd quarter of 1983 and the 4th quarter of 1985. Interest rates shot up from 8% in early 1981 to 18% by the end of 1982, and then after a brief period of cutting in 1983 surged ahead to 24% by the end of 1984. The result on real house prices was a -44.3% decline from the 1st quarter of 1984 to the 1st quarter of 1987. The notable scenario from this time was that the global economic environment turned against South Africa rapidly with commodity prices tumbling, foreign capital inflows slowing and the Rand depreciating sharply. South Africa was therefore forced to move back to a situation of living within its means by running a current account surplus.

The current situation has many similarities to the early-1980's. By June of this year the IMF Metals Commodity Price Index was -48% down on the peak reached in February 2011. The Real Trade Weighted Rand exchange rate is -22% down from the high reached in the 4th quarter of 2010. GDP growth has stagnated and we are running a current account deficit of -5,4% of GDP. Our interest rates have been abnormally low for an extended period and have started their upward cycle. This is not to say that we are expected to experience anything like the dramatic increase in interest rates recorded in the 1980's as the Reserve Bank's strategy is one of a slow gradual increase over a longer period of time.

The risk to South Africans is if the global economy moves rapidly in a negative direction with the US Federal Reserve expected to increase rates in September and China experiencing slower than expected growth thereby further dampening the global demand for resources and our exports. As a South African property investor it is therefore prudent to understand the impact US interest rates, Chinese growth and our current account deficit has on our property prices.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com