The tightening of monetary policy since mid-2006 on the back of inflationary pressures has contributed to domestic consumer demand and the growth in private sector credit extension to gradually slow down towards the end of last year, according to the Absa Housing Review for the first quarter released today

By the end of 2007 CPIX inflation rose to well above the 6% level, which is the upper limit of the inflation target range. This was related to oil price, rand exchange rate and domestic fuel price movements over the last number of months, while food price inflation has also been on a sharp upward trend as a result of domestic and international supply and demand conditions.

CPIX inflation, Absa says, will remain under upward pressure in the short term, with the inflation rate forecast to peak at a level of well above 8% in the first quarter of 2008, declining gradually to just above 6% by the fourth quarter of this year.

“ In view of these inflation expectations, interest rates are forecast to remain stable at current levels until early 2009. These factors, as well as the effect of the National Credit Act, are set to cause a further slowdown in the residential property market and drive mortgage advances growth lower over the next twelve months.”

Although the full impact is still to be determined, the electricity crisis that gripped South Africa since the beginning of the year is expected by Absa to affect overall production, fixed capital formation, employment, income, consumption, and confidence levels in the economy.

“As a result, the rand exchange rate may depreciate, growth in real gross domestic product is forecast to slow to below 4% this year, whereas costs are expected to increase over a wide front. Higher costs will to some extent be passed on to the consumer, which will, together with a weaker exchange rate, add to additional upward pressure on inflation. This implies that interest rates will probably have to remain relatively high for some time, curtailing consumption and economic growth.”

The housing market is not expected by Absa to escape these developments unscathed.

“The acute shortage of electricity may dampen and even halt new housing developments, which may cause the demand for existing housing to increase, causing price growth to accelerate on the back of demand and supply conditions.

“However, the affordability of housing, already a major issue for many prospective homebuyers in especially the low- and middle-income categories, will become even more important against this background, as well as factors such as the National Credit Act, inflationary pressures, high interest rates and slowing household disposable income growth.

“This situation may cause homebuyers to consider even smaller, more affordable, and probably higher-density housing in future. Residential properties focused on environmentally friendly energy consumption will also be high in demand and may
carry a price premium.”

In view of these expectations, Absa is forecasting a house price growth of 7,8% in nominal terms and 0,1% in real terms for 2008, reflecting prevailing monetary policy conditions, the effect of the National Credit Act and expectations of markedly lower real economic and household disposable income growth this year.