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Outlook for 2016 – FNB

A year of hard work for property and consumer-related sectors appears likely, given economic and household sector income growth mediocrity, but perhaps the good news is that there is little currently to suggest any more than very mild interest rate hiking. John Loos, FNB Home Loans household and property sector strategist reports on his outlook for 2016 in the latest FNB Property Barometer Property Weekly.

It is the time when we all like to speculate heavily on the main themes that the new year is likely to hold for us, and whether or not there will be any major trend changes.

At the present time, little seems to have changed early in 2016 with regards to a somewhat mediocre economic outlook for South Africa. Global commodity prices remain depressed. On the one hand, this bodes ill for South African export growth and thus for economic growth, but on the other hand it bodes well for the consumer price index (CPI) inflation rate given that oil is one of those commodities whose prices remain under severe pressure.

At a macroeconomic level, therefore, the likelihood of any major CPI inflation “shock” at this stage appears remote in 2016. However, there are some “upward” pressures on CPI inflation which could be expected to drive it gradually higher, notably a drought-driven food price inflation rise as well as a Rand that still remains under pressure, driving import prices higher. Higher CPI inflation would eat a little more into disposable incomes. But it is expected to be a modest rise in inflation, which would allow the Reserve Bank (SARB) to continue to raise interest rates at the snails’ pace to which we have become accustomed through 2014 and 2015.

The big deal on the macroeconomic policy stage this year is likely to be the Budget Speech, as ratings agencies and investors look for clues as to if and how the Minister of Finance will arrest the steadily rising trend in the government debt-to-GDP ratio, a key source of concern in recent years.

For the consumer, government moves to narrow its fiscal deficit and slow the rise in its debt burden in all probability means a further rise in the “effective personal tax rate”. This could, but does not necessarily mean an increase in the marginal tax rate. The easiest way to raise this rate is merely to not fully adjust tax brackets upwards for inflation “bracket creep”. This, however, would not represent any trend change, as the ratio of personal and wealth taxes/disposable income ratio has been rising steadily for some years now. A bigger question is whether or not we will see a rise in the VAT (Value Added Tax) rate. Whatever the detail, I would expect the household sector tax burden relative to disposable income to rise in 2016.

More related to housing and the CPI is municipal rates and utilities tariffs, which are also expected to continue their above-CPI inflation pace of increase.

Economic growth is likely to remain under pressure, and economic growth to continue on its broad multi-year slowing trend that started back in 2012. The downward pressure on growth comes from South Africa’s well documented structural constraints, including its highly unequal skills distribution and rigid labour market, but also from weak global commodity prices and gradually rising interest rates.

One “interesting” consequence is that power load shedding may be muted in 2016, a result of a significant decline in demand for electricity in recent times as the economy stagnates.

The lagged impact of a multi-year growth slowdown could well be a decline in formal sector employment in the private sector, and the result is likely to be another year of very poor consumer confidence. This, in turn, could lead to a key trend change towards a financially more conservative household sector.

What would this mean? It is possible that the dismal household sector savings rate, which hangs around in net “dis-savings” territory, may actually start to improve. Such a savings rate improvement would be an attempt to compensate for investment asset values which are not rising significantly of late, and which have begun to result in a decline in the household sector net wealth/disposable income ratio.

In addition, we could expect to see a renewed slowing in household sector credit growth, as a more conservative borrowing approach also rears its head. Under the circumstances, greater financial conservatism by households would be a positive development.

However, a more conservative household sector would likely constrain the performance of the residential property market. So, after a likely average house price growth rate of around 6% in 2015, mildly slower than the 7.1% of 2014, we would expect further slowing in this average rate in 2016 to lower single-digits, possibly below 5%, which would be reflective of some slowdown in residential demand.

Within the residential market, the conservative household is also expected to make its presence felt in terms of what the buyers go for. Smaller-sized homes and smaller average stand sizes are expected to be more sought after as a portion of households tries to contain home operating cost increases, notably the steadily-rising municipal rates and utilities tariffs. This may keep the sectional title market’s house price growth at mildly better levels than that of full title.

Luxuries such as swimming pools are likely to become even less cool, so we would expect new home building to be very much focused on basics and “few frills”. However, a greater focus on energy alternatives to the grid may be witnessed in middle-to-higher income areas, given further power tariff increases last year.

We further anticipate that lower and middle-income areas will outperform the high income/price end of the market in terms of house price growth, as a portion of demand shifts “down” in search of greater affordability. Not that house price inflation is likely to be a major contributor to a further deterioration in home affordability. Rather, it is the expectation of mild further interest rate hiking in 2016 which would gradually lead to further affordability deterioration.

Home buying is also likely to be overwhelmingly about “essentials”, meaning primary residential demand, so we would expect the primary residential demand-dominated city markets to begin to outperform the holiday town markets. Many other less economically-diversified rural towns may also be at greater risk than the major metros in 2016, notably mining and manufacturing-driven towns (given the severe weakness in those sectors of the economy), while the drought poses threats to many towns where agriculture is the dominant driver too, depending on how long the drought continues for.

One trend change in the residential market could be a renewed rise in yields on residential property. Part of a more conservative household spending approach could be some strengthening in demand for rental properties, driving rental inflation slightly stronger while house price growth falls slightly slower. The combination could start a rise in yields.

In short, therefore, 2016 looks set to be a year of hard work and a need for property and consumer-related businesses to improve their creativity and efficiencies, in an economy that looks set to continue its mediocre performance. It is thus realistic to expect a financially constrained consumer, a more conservative approach to both consumption expenditure and home buying, and possibly a higher household savings rate to come.

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