JUNE 2013 UPDATE of S A RESERVE BANK data for 2013Q1 Dr Johan Snyman STELLENBOSCH 20 June 2013

Introduction The SA Reserve Bank investment data for the first quarter of 2013 have been released. The latest figures reflect a modest revival in building and construction demand. Figures show that housing bottomed out in the third quarter of The residential sector dropped marginally during 2012Q4 and 2013Q1, after rising for four consecutive quarters. Mortgage loans for new houses and for existing buildings moved sideways at a very low level during 2013Q1. The non-residential sector improved slightly when 2013Q1 is compared to 2012Q4. The construction works sector grew marginally when 2013Q1 is compared to 2012Q4. Overall, building and construction investment trends are becoming more positive, but low growth rates early in the year reflect an industry that is gathering momentum rather slowly.

The level of Gross Domestic Product is rising moderately

This slide provides a backward-looking view of our current economic performance

This slide provides a forward-looking view of our current economic performance

The SARB Composite Leading Indicator has been moving virtually sideways for about two years, a reflection of low growth, both globally and locally

Residential investment dropped for 19 consecutive quarters, then rose for four consecutive quarters, with a slight dip in 2012Q4 and 2013Q1

The year-on-year growth rate is barely positive, reflecting a modest revival in the housing cycle. Moderate growth is expected in coming years because of still high consumer debt levels and low income growth

The latest SARB figures are reflecting the recovery presaged by BER business survey data

The ratio of household indebtedness rose from 50% in 2003 to 83% in 2008Q1. The level in 2013Q1 is 75.4%. This is an indication that consumers are trying their best to maintain living standards by reducing debt quite slowly … many households are even taking on new debt in the form of unsecured loans

The debt-servicing ratio has dropped from 12% in 2009 to 7.7% (just below the long-run average of 7.9%) because of lower interest rates and a slow decline in debt levels

Non-residential investment reached a peak in 2008Q4, then dropped and rose again from 2011Q1. The cyclical course is essentially sideways at a high level

Growth rates were positive for seven years, then turned negative for eighteen months in accordance with the historical pattern. The present (smoothed) annual percentage change is virtually zero with modest growth expected during the remainder of 2013

Observe that the BER survey data usually lead the cyclical fluctuations recorded in the SARB figures. BER survey data are presaging a modest improvement in investment levels in coming quarters

This comparison shows that non-residential investment is currently greater than residential investment, and that both sectors are reviving rather slowly. It also shows that the downturn from peak levels was more severe in the residential sector

The improvement in Total Building Investment, presaged by the MFA Composite Leading Indicator for the SA Building Industry (CLIBI), is now being reflected in SARB data (i.e. modest 3% y-o-y growth)

Next, we analyse housing finance …

The indicator of Mortgage Loans Granted for New Dwellings is showing a very slow recovery from the negative effects of the National Credit Act

The indicator of Mortgages Granted for Existing Houses is still reflecting the slow recovery in the residential property market

The price of available land for development is sure to rise rapidly in future years given the severe drop evident in the graph. The supply is being curtailed by the lack of demand, the lack of housing finance and a shortage of Eskom electricity connections

These two key time series have the same y-scale, but the data are gathered in totally different ways. The similarity in their cyclical course inspires confidence in the validity of the basic data

This slide shows the slow recovery evident in the property market

In the past, mortgage loans would rise when interest rates (inverted here) dropped. During the current cycle this pattern was broken by the introduction of the National Credit Act that reduced the number of qualifying prospective homeowners who planned to build. Hopefully, the gap should reduce in coming quarters if banks provide more housing finance

This breakdown shows that roughly 91% of total mortgage loans are granted for existing buildings, about 7% for new dwellings and only 2% for vacant land

Finally, we analyse trends in Construction Works Construction Works is a SA Reserve Bank term that represents the turnover of all the companies that have erected or constructed civil engineering structures of all kinds, representing the cost of labour, materials, plant, fuel, overheads, etc., plus profits, including professional consultants' fees. This SARB category includes: Roads, Streets, Bridges, Dams, Waterworks, Sanitation, Airport runways, Power stations, Harbours, Railway lines, Oil drilling, Gas and Fuel pipe lines, Communications towers … Buildings (residential and non-residential) form a separate SARB category. Machinery and Equipment (including transformers, generators) put into factories, as well as Transport Equipment (commercial vehicles, trains, boats, ships and airplanes) are also separate categories.

Investment in construction works dropped from 2009Q4 to 2010Q3 and now reflects a U-shaped recovery at a very high level

Growth rates dropped sharply because of comparative base effects. This happens when current levels are being compared to high levels recorded a year ago. Growth rates turned positive again in 2011Q1 and continued into positive territory during 2013Q1 (3% y-o-y)

The rise in the confidence levels of civil contractors is being reflected in the latest SARB investment data that reflect a sideways momentum

Our long-term view …

Conclusions: Trends in Gross Capital Formation As our graphs show, the recent building boom raised levels of investment to all-time highs. In the case of housing, the subsequent downturn lasted longer than anticipated, in the main, because the introduction of the National Credit Act (July 2007) and the global financial crisis of 2008/09 changed the lending behaviour of banks. Mortgage finance became scare and indicators of mortgage loans granted for new and existing houses continue to plod along. The modest revival in housing has started from very low levels recorded during the severe downturn 2007 to Current SARB housing investment data are recovering more slowly than in previous revival phases of the economy. Modest growth of only 3% to 5% in housing is foreseen. Current SARB non-residential investment data are reflecting a virtually sideways movement at high levels. Current SARB data in the civil construction sector are at historically high levels, but can they be sustained? We think not, because several high value construction projects reflected in the figures have been completed.

Thank you for your attention … Johan Snyman