Tag: Credit

Credit and housing markets: Still no case for higher rates

The credit and money supply numbers for April 2011 indicate that the pace of money supply and credit growth, especially growth in mortgages, pedestrian before, is slowing down gradually, rather than accelerating. The growth trends in M3, the broadest definition of the money supply including almost all deposits issued by the banks, is most clearly pointing lower.

It is demands for bank credit that lead the money supply process in SA. As the banks lend more, the Reserve Bank accommodates the banks with additional cash- that is cash reserves – at the prevailing repo rate. More credit demanded leading to more money supplied is the modus operandi of the SA Reserve Bank. The demands for credit lead the supply of cash and more broadly defined money. A large proportion of SA bank lending is on mortgage and mortgage demands remain especially tepid as we also show below.

Growth in mortgage lending follows house price inflation, as we show below, where it may be seen that the price of the average home is now unchanged compared with a year ago. A housing boom leads to a credit boom and rapid growth in the money supply as it did between 2003 and 2008 – and when the housing boom slows down, so does money supply growth as it has recently. Interest rate settings have proved incapable of effectively moderating the credit and money supply cycles in SA.

Until the housing market picks up the growth in bank lending will remain subdued. The recovery in the housing market has lagged behind the recovery in the economy. It will take further growth in formal sector employment to revive the housing market.

Lower interest rates on mortgage loans, applied much earlier in the slow down, might have helped moderate the contraction in the credit and money cycles, but these now appear most unlikely given the recent uptick in inflation. The credit and money supply numbers should however help dissuade the Reserve Bank from raising interest rates.

There is clearly no money or credit supply growth reason for raising interest rates, nor any excess demands for houses or anything else that would need to be restrained by higher interest rates. Indeed the opposite, lower rates, would still appear appropriate, given the state of the economy and in particular the state of the housing market and the construction industry that is an important employer of labour.

We show below the recent collapse in the cycle of buildings completed. We show how building plans passed have led the building industry lower. The indication is that he planning cycle has at best bottomed out, offering only the hope that construction activity will soon also bottom out and recover.

It is of interest to note that house prices lead not only mortgage demands but also building plans passed. It takes higher house prices to encourage construction activity.

The weak state of the credit and housing markets, that are inextricably bound together, makes the case for lower rather than higher interest rates. The Reserve Bank appears understandably reluctant to raise interest rates in the circumstances. The currently higher inflation rate is of the supply side, cost push administered price variety over which monetary policy has no influence and if it persists will weaken demand further.

Furthermore, as we have mentioned before, we have found no evidence of second round effects of inflation, that is, more inflation that leads to more inflation expected that leads in turn to more actual inflation. Fighting these feared second round effects have become an argument for higher interest rates, regardless of their negative effect on economic activity. Such arguments should be ignored and the SA public and market place made to understand why.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Daily View 1 June: Credit and housing markets: Still no case for higher rates

Bank credit and vehicle sales: No room for complacency

The bank credit statistics updated by the Reserve Bank to March 2011 indicate that weak growth in the supply of bank credit to the SA economy may be slowing down rather than gaining momentum. As we show below, our calculation of the underlying trend in the supply of extra bank credit to the private sector, suggests as much. Year on year growth appears to have stabilised at just over 5% (about a very modest 1% after adjusting for inflation) while the underlying trend growth has declined to a just over a 4% rate.

Behind this weakness in the supply of and demand for bank credit is the housing market and so the demand for mortgage loans. Mortgage loans have become an ever more important asset of the SA banks and now account for about 50% of all bank lending to the private sector.

House price inflation understandably leads mortgage lending as we also show below. The more valuable the house the larger the mortgage loan provided to secure it. Moreover house price inflation encourages home ownership. House prices are however not providing much encouragement to home owners, potential home owners or the banks. Clearly bank lending and money supply growth are not contributing any impetus to the SA economy. By implication therefore interest rates in SA are too high rather than too low: a point that will be taken account of when the Monetary Policy Committee (MPC) of the Reserve Bank meets next week.

The market for new and by implication used vehicles in South Africa has been the most conspicuous benefactor of lower interest rates and a stronger rand. However sales statistics for new units sold in April indicate that the growth momentum has slowed down. April with its many public holidays is typically a very slow month for vehicle sales, as slow as December for similar holiday reasons. April 2011 saw more than the usual numbers of days off and so April vehicle sales will need to be treated with more than usual caution. For the record, unit sales adjusted for seasonal factors (as far as we can measure them accurately) declined from 49 003 units in March 2011 to 42 830 units in April.

Furthermore the ripples from the Japanese Tsunami are still to be felt in the supply chains (including SA plants). In the months ahead new vehicle sales may well be inhibited by a want of supply rather than a lack of demand, making this leading indicator temporarily less helpful than usual.

The recent credit and vehicle sales statistics justify the caution expressed at the last MPC meeting about the state of the SA economy and the risks to the growth outlook. The credit and money numbers state very clearly that there is no pressure from the demand side of the economy on output, employment or prices.

The food and energy prices that have risen have their sources well beyond the influence of monetary policy in SA. They nevertheless help slow down rather than speed up the local economy.

These facts of economic life in SA should continue to give the MPC pause. There is no case for higher interest rates in SA. Indeed there is a much better case for lower rather than higher interest rates to add momentum to money supply and credit growth, which are too slow rather than too rapid for the good of the economy.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View:Bank credit and vehicle sales: No room for complacency

Good news about home loans and employment

In a previous note on the state of the SA economy we pointed to the weakness in bank lending and the slowing growth in the money supply, particularly in the supply of Reserve Bank cash to the banks and the public. This indicated to us that while the SA business cycle was firmly in an upswing phase, the pace of recovery was not accelerating.

We showed that the housing market leads the credit market – higher house prices both encourage home owners to spend and borrow more and encourage entrants to the housing market. Higher house prices also mean larger mortgage bonds issued by the banks.

We suggested that what was needed to add momentum to the housing and credit markets market was growth in employment. Get a good job and the credit to buy a house and a car will likely follow.

In this regard the news from both the job and home loan markets in March, released this week by the leading employment agency Adcorp and the bond originator Ooba, was very encouraging. Ooba reported via I-Net Bridge that the number of bond applications in March had reached a three year high, that the average number of bond application in March was the highest level recorded since May 2008 and 36% higher than the average monthly application intake recorded in 2010. Not only applications but approved home loans were also strongly up and represented the highest value of approved home loans since October 2008. Yet these much improved volumes of potential bond business were still only 36% of the application volumes recorded at the peak of the market in May 2007.

Adcorp monitors the labour market very comprehensively and reported in its March Employment Report that in February employment in the formal sector was up 7.3% on a year before while informal employment grew by 2.0% “, the first time since January 2006 that the formal sector drew workers out of informal employment..” Its Index of Employment, having moved sideways, is now pointing higher.

The business of Adcorp is to find jobs for workers, something it has proved very successful at but whose success has inspired a Cosatu led thrust to close its business down.

The news from the labour and housing market must be regarded as encouraging, but not yet encouraging enough to lead the Reserve Bank to become less cautious about the state of the economy. As the IMF suggested, and as we have done, any early move to higher interest rates would be highly premature. Hopefully also the SA government will leave what is working well in the labour market (the demand for and supply of temporary employment) well alone.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Daily View 13 April: Good news about home loans and employment

Money and credit: Sill growing too slowly for GDP and employment growth

The money and credit statistics released by the Reserve Bank yesterday indicate that while the money supply (broadly measured as M3) is maintaining a satisfactory rate of growth of around 7% per annum on a quarter to quarter basis, credit extended by the banks to the private sector has remained largely unchanged over the past quarter. Not coincidentally, the price of the average home in SA is also largely unchanged over the past year.

It will take an increase in mortgage credit to lift house prices, while it will take an improved housing market to encourage the banks to lend more and for property developers to wish to borrow more. The trends in money and credit supply indicate that short term interest rates are still too high rather than too low to assist the economy to realise its potential output growth. And so policy set interest rates are unlikely to increase any time soon.

The lower level of mortgage interest rates and a significantly lower debt service ratio for the average SA household  (See below) still have work to do to revive the housing market and construction activity linked to higher house prices. Perhaps the authorities, now so concerned with employment growth in SA and intending to subsidise employment with tax concessions, should be reminded that house building and renovations are highly labour intensive.

For graphs and tables, read the full Daily View here: Money and credit: Sill growing too slowly for GDP and employment growth