Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2015-08-21

It is fascinating how the Manufacturers Purchasing Managers' Index (PMI) tracks residential property prices and can be considered one of the best leading indicators of property prices. In other words your house price growth can be expected to follow the direction that the PMI is trending towards. The PMI is a registered trademark of Stellenbosch University, whose division, the highly respected Bureau of Economic Research or BER, produce. It is an economic activity index, which is based on a very detailed survey of hundreds of participating companies conducted by the BER and sponsored by Barclays. Online searches will reveal published Manufacturers PMI indexes by Standard Bank and Kagiso as well which can be a little confusing.

The Standard Bank version is produced by a company called Markit Economics Ltd. The two reports published in August with the latest July 2015 data do however provide slightly different results. The Standard Bank PMI report highlights a decline in the July figures to 48.9 from 49.2 in the previous month and is a weighted average of five individual sub-components (of South African Manufacturers): New Orders, Output, Employment, Suppliers' Delivery Times and Stocks of Purchases. An index figure of 50 is considered neutral, anything below a contraction and anything above an expansion in the economy.

Standard Bank's report said that Output and New Orders contracted the most in the face of a weakening economic environment and subdued demand. In comparison to this rather bearish report by Standard Bank the Barclays/BER PMI report for July showed an index at 51.4, which was unchanged from the June 2015 level and up from the May 2015 level. However the Barclays/BER report does point to the leading indicator of the PMI declining in July thereby pointing to an expected contraction in Manufacturing going forward. The main categories that make up the Barclays/BER PMI are measurements (or Indices) for Business Activity, New Sales Orders, Employment, Inventories, Purchasing Commitments and Prices in the Manufacturing sector.

FNB's recently published House Price Index report seems to draw on the data produced by the BER and published as the Barclays/BER PMI Report. The FNB House Price Index grew by 0,7% in July from the previous month and shows a slight increase in house price growth to 5,9%. Average house price growth is forecast by FNB to be 5,5% for the year, and a further decline can therefore be expected between now and the end of the year. The most recent CPI inflation data we have shows that general prices grew by 4,7% in June meaning that real house price growth measured 0,7% in that month. Real home prices are currently -18.7% below the boom time peak prices reached in December 2007.

This means that they are still relatively high compared to the pre-boom prices recorded in January 2001. Fifteen years later real house prices are on average 66.2% higher. In nominal Rand terms house prices are 274.5% higher today than they were in January 2001. FNB's outlook is that the current PMI levels can be expected to adjust downwards given China's economic situation and outlook being poor and global commodity prices remaining under pressure. FNB is forecasting a further two increases in interest rates for this year, each of 0,25%. This means that we can expect the Prime interest rate to be 10% by the end of 2015.

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

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