'70% lows of April worsen in May'
The SA economy has just about ground a halt.
It was already in recession before going into lockdown and we have seen most sectors plummet in April with worse is to come for May. New car sales which is usually at around 40,000 per month, fell to just 500. Real estate volumes, which was already trading at about 30% below normal market conditions before lockdown, fell by at least 70% in April and will worsen in May.
With the market in a battle to regain stability, a sharp cut in the repro rate will not only go a long way to stimulate a recovery, but it will also free up much-needed cash to push demand and upward growth for the economy.
There is a great deal of uncertainty in the market. Consumers and businesses are under enormous strain. A meaningful cut in the interest rate will alleviate the financial pressure on households and businesses and on the other hand, bring down borrowing costs to stimulate demand and economic activity.
As the lockdown is eased, a drastic rate cut will be a lifeline for households and businesses. It will help keep more people in jobs, enable more SMME businesses to keep going and enable people to hold onto their homes and financed assets. More disposable income will stimulate retail and other sectors of the market including property.
Three House Price Inflation scenarios that may play out during 2020
But as the stalled residential property market battles to gain stability, the added pressure imposed by the Covid-19 pandemic will see it bracing for severe inflationary impact, irrespective of sharp rate cuts.
Industry analysis by experts Lightstone put house price inflation at the end of 2019 at under 2%, with the last peak in 2014 at 6,35%. Before the Covid-19 crisis hit, 2020 national house price inflation was estimated to drop below the 0% barrier for the first time since the 2008 economic recession.
With very little or no certainty on how this black swan event will ultimately play out, Lightstone decided to model three scenarios based on the GDP dropping between 3% to 10%,” says Analytics Director, Paul-Roux de Kock
Three different scenarios that may play out during 2020. Source: Lightstone
For Scenario 1 or Generic Recession - House price inflation is forecasted based on the assumption that the GDP may decline by 3% with a subsequent deflationary effect on consumer price inflation. The reduction in CPI inflation leads to a further drop in interest rates making goods bought on credit more affordable.
“In this scenario, we expect house price inflation will end the year off at -3.9%.”
In Scenario 2, de Kock says, “A negative house price growth of 8,8% for Scenario 2 or Unchartered Territory sounds alarming, however when we look at the 2008 property crash, house price inflation dropped to as low as -5.4% during a time when economic growth only declined by 1.8%.”
This scenario assumes a drop in GDP of 6% without a noticeable reduction in CPI inflation, leaving limited moving room for further interest rate adjustments.
Actual national inflation rate from 2000 to 2020. Source: Lightstone
In Scenario 3 we really stretched our forecast models – which was not built to perform under such extreme conditions - to its maximum. We assumed a negative GDP growth of 10% with an increased reliance on expensive imports due to the weaker currency ultimately driving CPI inflation up and forcing the Monetary Policy Committee to reverse the downward interest rate cycle.
Under this scenario, Lightstone predicts that house price inflation could end the year off at -14.5% but warns that under such conditions “all bets are off” as the usual predictive interplay between GDP growth, CPI inflation, interest rates and house price inflation will start breaking down.
Inflation predictions across different value bands. Source: Lightstone
*Lightstone details these three scenarios as analytical predictions based on the potential outcome of the compounded effect of the lockdown restrictions on businesses and households. A more accurate forecast can only be made later in the year as the length and subsequent effects of the lockdown is better understood and reflected in home sales data.