John Loos on the Property Outlook

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What needs to happen before the next strong property performance and how long will it take?

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John Loos on the Property Outlook

  1. 1. First National Bank - a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider (NCRCP20).October 2011 it take? next strong property Property Outlook performance and how long will What needs to happen before the
  2. 2. FNB House Prices FNB House Price Index - Real and FNB House Price Index Growth Nominal Growth (Seasonally-adjusted month-on-month)40% 1.5% 1.34%30% 1.0%20% 0.5%10% 0.0% 5.6% Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0% 0.3% -0.5% -0.24% Jan-02 Jan-04 Jan-06 Jan-08 Jan-10-10% -1.0%-20% -1.5% FNB House Price Index - year-on-year percentage change FNB House Price Index - Seasonally Adjusted - month-on- Real Average House Price (CPI adjusted) - year-on-year percentage change month percentage change
  3. 3. Great Depression US Debtsituation appears tame
  4. 4. Constrained oil supply makes for economy-constraining prices Brent Crude Oil - Real $/Barrel 60 20 50 15 10 40 $/barrel 5 % 30 0 20 -5 10 -10 0 -15 1970 1975 1980 1985 1990 1995 2000 2005 2010 US real GDP (q/q % ann.) Real brent crude - $/barrel
  5. 5. Some key economic indicators are slowing again Key Leading Indicators - month-on-month % change 2.0% 1.5% 1.0% 0.5% 0.0% Jan-00 -0.5% Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 -1.0% -1.5% -2.0% -2.5% South Africa Leading Indicator OECD Leading Indicator USA Leading Indicator
  6. 6. High household indebtednesscontstrains economic growth Household Debt to Disposable Income Ratio vs Interest Rates 82 25 80 76.8 23 21 70 19 17 % 15 % 60 13 11 50 9 7 40 5 1990 1993 1996 1999 2002 2005 2008 2011 Household debt-to-disposable income ratio (Left Axis) Prime Rate
  7. 7. SA Long term economic growth rate trends Real GDP Growth - 5-year annual averages 5 4.2 4.2 4 3.2 3 2.8 2.8 2.6 % 2 1.3 1 0.6 0 1971- 1976- 1981- 1986- 1991- 1996- 2001- 2006- 1975 1980 1985 1990 1995 2000 2005 2010 Real GDP Growth - 5-year annual averages (%)
  8. 8. Long term consumer price inflation and short term rates trends Long Term Consumer Inflation and Interest Rate Trends 20 % 10 0 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Consumer Price Inflation (PCE Deflator - y/y % change) Prime Rate
  9. 9. FNB Cap Rate Index FNB All Commercial Capitalisation 120 Rate Index vs Long Bond Yields 13 110 12 Cap rate Index (Q1 2001 = 11 100 Yield (%) 10 90 9 100) 80 8 70 7 60 6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 FNB All Commercial Capitalisation Rate Index (Q1 2001 = 100) Government bond yields 10 years and longer (%)
  10. 10. Wide replacement cost gap hasslowed building activity Full Title Property Replacement Cost Gap 40.0% 30.0% 21.7% 20.0% 10.0% 0.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -10.0% Difference between the average full title building replacement cost and the average existing full title property value, expressed as a percentage of average existing full title property value
  11. 11. Market still unrealistically priced –homes too long on the market Average time that a property is on the market Weeks and Days on the Market 20 16 15.1 12 8 4 0 2005 2006 2007 2008 2009 2010 2011 Weeks and days that the average property is on the market before being sold Smoothed
  12. 12. FNB Valuers indicate weak demandrelative to supply FNB Valuers Residential Market Strength 75 Indices 70 65 Index Scale 0 to 100 60 57.95 55 50 47.53 45 44.79 40 35 30 25 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 FNB Valuers Market Strength Index (Scale 0 to 100 where 50 indicates a balanced market) Demand rating (scale 0 to 100) Supply rating (scale 0 to 100)
  13. 13. The Long Property Cycle (RealHouse Prices) Affordability of housing (Using Absa HPI) Affordability Indices 2000=100 300 5.5 year 15 year Stagnation Period 8.5 year Boom (Abnormally Long?) Boom Period Period 250 200 150 100 50 0 1970 1975 1980 1985 1990 1995 2000 2005 Average house price/average income ratio (Index 2000=100)
  14. 14. Commercial property tracks residential propertywith lag (243% incr. since Q1 2001 vs Residential209%) FNB All Commercial Capital Growth Index vs Residential Price Growth 90% 40% 35% Year-on-year % change 30% 60% Year-on-year % 25% 20% 30% 15% 10% 5% 0% 0% 2002 2004 2006 2008 2010 -5% -30% -10% FNB All Commercial Average Property Value - Year-on-year % chnage Average House Price - year-on-year % change
  15. 15. Returns in 2011 starting toweaken again Total Returns (%) by Property Type (Source: IPD) 40 % Total returns per square metre 35 30 25 20 15 10 5 0 1995 1997 1999 2001 2003 2005 2007 2009 H1 2011 All Property Office Space Retail Space Industrial and Warehouse Space
  16. 16. Follow our Research on:http://blog.propertyleader.co.zaResearch mailing list:propertybarometer@fnb.co.zaJohn Loos on Twitter:@john_loos

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