Resilience in house prices despite weak labour market: Standard Bank HPI June up 7.3% y/y

· SBR’s HPI edged up 7.3% y/y in June, from a downwardly revised 6.6% y/y (originally 6.8% y/y) in May (fig 1). Sub-indices show that freehold properties rose 8.7% y/y, from a slightly downwardly revised 7.8% y/y in May (originally 7.9% y/y), while sectional title properties were flat at 9.6% y/y (May print revised from 9.8% y/y) (fig1).

· The resilience in property prices reflects credit extension that took longer than expected to decline, in line with the deteriorating macroeconomic conditions (declining real disposable income, rising food inflation; interest rates and unemployment) as well as tighter financial conditions (fig 2 & 3).

· Further, HPI and food inflation have shown a close correlation since mid-2010. More recently, the HPI lagged food inflation by one to five months (fig 4). Due to the drought, inflation has been soaring, but we think that it may have already peaked in April 2016 at 12.8% y/y. The recent growth in house prices might be in keeping with this historical relationship.

· According to Stats SA’s QES (non-farm payroll data) for Q1:16, the economy shed 15,000 jobs, compared to Q4:15. The biggest employment loss came from the mining sector (-6.8% y/y), while the manufacturing sector recorded zero growth in employment y/y (fig 5).

· From an earnings perspective, average real wage inflation per worker declined, from 1.2% y/y in Q4:15, to -0.3%y/y in Q1:16 (fig 6). Real wage inflation in the public sector declined -0.1% y/y in Q1:16, from +2.3% y/y in Q4:15, alongside Transport, Retail, Construction, Utilities, and Manufacturing sectors. Mining and Finance sectors recorded positive real wage inflation (fig 6).

Standard Bank expects the softening of the labour market to continue in light of the slump in economic activity. Declining real wages and rising interest rates will also put pressure on consumers’ disposable income and aggregate demand.

· However, according to EY/BER credit standards for approving applications for loans by Retail Banks to households showed a mild easing in Q1:16 relative to Q4:15, but remained tight (fig 7) despite the softening labour market.

· Against this backdrop, the consumer seems to be showing some resilience from a debt-servicing point of view. Though in the past five downward phases of the business cycle, insolvencies increased alongside rising interest rates, this historical relationship now seems to have diverged in the current phase which began in December 2013, with insolvencies declining despite interest rates rising (fig 8). We think that the consumer is aided by interest rates rising from historically low levels.

Read more here: Standard Bank June HPI