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Admittedly, lower commodity prices should provide the global economy as well as SA with some support for economic growth, while the lower interest rates in many of the large economies have to bear fruit at some point.

At current levels, the weaker rand (although not a cure for a country’s long term ills) should also provide some short term support for economic growth by channeling some import demand towards locally produced goods while supporting exports partially. In addition, SA’s financial system appears to be relatively healthy and not on the brink of falling over.

The prospect of lower interest rates locally in 2009 also hints at some additional support for growth. It is thus not clear that South Africa will be required to follow the likes of the US into a full blown recession.

But the fact of the matter is that the world’s largest economy is in the biggest financial sector crisis in living memory it is said by many, and the massive Federal Government bailout of financial institutions is well-documented. What is not clear yet is whether this is the end of it all of merely the start of something far bigger. And as global financial institutions pull back on lending to and borrowing from each other, due to their uncertainty as to who is going to be around and who is not in the near future, availability of funding for domestic banks also suffers. In addition, until we have greater clarity on where the end of the financial crisis is, it is tough to ascertain the potential impact on the global economy.

While SA’s financial institutions are not highly exposed in the direct sense of the word, i.e. through holding debt instruments emanating from US mortgage associations for instance, they are nevertheless highly exposed in the indirect form via any potential shock to the global and therefore domestic economy.

The risk for mortgage lenders locally thus changes from rising bad debt risks due to rising interest rate, to the risk of rising bad debt due to increasing job losses should the global crisis be significantly worse than appears at present, and should this exert enough pressure on the world economy so as to send SA into recession too.

Therefore, while Firstrand’s most probable scenario is not one of recession, the high risks associated with any view in these troubled times lead me to expect cautious lending practices of home loan banks to ensue for some time, and the continued decline in the year-on-year percentage change (including a period of deflation) in the overall house price index until at least around mid-2009. This is despite inflation and interest rate prospects looking more promising.

Only towards mid-next year do I expect new mortgage advances granted to turn to positive year-on-year growth once more (providing the global crisis is not far worse than currently appears), and for the turn of the overall house price index to follow a little later.

The mild price deflation witnessed in the house price index cannot be said to reflect the full extent of market weakness, although I believe it still points in the true direction of the market, i.e. weaker.

There are a couple of practical challenges with calculating a house price index, and the main one is that these indices are calculated on the properties that get transacted and not on total stock that is in existence. In the perfect world, one would like to value each unit that exists in the country, every month, and then update the average value. But that will never be practically possible, and so one has to go on that far smaller number of units that gets transacted in each period.

This would be fine if the ratio of units transacted per period expressed as a percentage of total stock was the same across all areas and market segments, but this is not the case.

End of Part Three