According to new research from Bloomberg Economics, a housing bubble is starting to form in many countries worldwide as they ease themselves out of the Covid-19 crisis. The research indicates that New Zealand, Canada and Sweden are the frothiest housing markets, with the UK and the US also ranking high in risk.
Bloomberg Economics uses a dashboard with indicators such as house-price growth as well as price-to-rent and price-to-income ratios to estimate countries’ “bubble rank”. However, one real estate mogul quoted by Bloomberg says it’s not yet time to panic. Blackstone President Jon Gray says there are two warning signs to watch for: too much leverage and too much building. Neither is yet visible in the real estate market.
Among the reasons cited for soaring housing prices are low interest rates, unprecedented fiscal stimulus, lockdown savings ready to be used as deposits, limited housing stock, and expectations of a robust recovery in the global economy. Stay-at-home workers upgrading to get more space and tax incentives for home buyers are also spurring growth in some markets.
While many countries in the Organisation for Economic Co-operation and Development (OECD) are seeing price ratios higher than they were before the 2008 financial crisis, residential real estate growth remains tepid in South Africa. Stripping out the effects of inflation, house prices are effectively flat, FNB’s latest data indicates.
“When borrowing costs do start to rise, real estate markets — and broader measures put in place to safeguard financial stability — will face a critical test.”
– Economist Niraj Shah
- Continuing on the housing theme, Bloomberg also reported that sales of US vacation homes sales surged 16% in 2020, nearly triple the gain for all existing homes, which was 5.6% according to the National Association of Realtors.
- Meanwhile, real-estate stocks have led the S&P 500 in recent weeks. The Wall Street Journal reported that the real-estate sector has gained 13% this quarter, more than double the 6.3% gain of the broader stock index. “As the economy recovers from its pandemic-induced slowdown, some investors are worried that rising prices could erode company profits and push the Federal Reserve to lift interest rates sooner than expected.”
- Consumer prices rose 5% in May from a year earlier, according to the US Labour Department, the biggest surge in inflation in nearly 13 years.
- The dollar has strengthened by 2.5% against its trade-weighted peers since its lows of late May, with the majority of the gain coming since the Federal Reserve’s update on Wednesday. While the US central bank kept rates at near-zero levels, it did guide the markets that it may see fit to raise rates twice before the end of 2023, on the back of optimism about the US economy. This news left the Greenback gaining traction, as a turning point in the rate cycle would lead to a reversal of outflows from the US, particularly over the past year, which occurred in a search for yield elsewhere.
- Following on our recent news flash which focused on jobs, the international Labour Organization has predicted that the global job shortfall from the pandemic will be 75 million this year. The Organization also doesn’t expect the gap to close in 2022, when it expects the world to still be 23 million jobs short of its pre-Covid path, even as economies rebound.
- As the Group of Seven (G7) seeks to clamp down on tax evasion across the world in a landmark agreement, Bloomberg has found that a new global minimum corporate tax could bring in $150 billion for worldwide governments. The proposed global minimum corporate tax rate of at least 15% is gaining increased prominence amid tax talks and would impose a non-binding minimum rate on multinational companies – a disincentive to those companies fleeing one country for another with lower taxes.
- The Economist is reporting that, after a heady start, US President Joe Biden’s legislative agenda has hit a wall. It stated that, after 100 days in office, Biden has managed to pass a $1.9 trillion rescue package despite painfully narrow majorities and his administration was triumphantly preparing future plans to spend trillions more on climate, infrastructure and safety-net expansions. Since then, however, little has happened, and the prognosis looks murky.
- Meanwhile, retail sales in the US dropped in May as shoppers chose to spend more money on services than goods, even as businesses reopen. This has been attributed to supply-chain disruptions and higher prices. Services spending is not captured in the regular report issued by the Commerce Department.
- Interestingly, Wall Street Journal reports that people are returning to restaurants, stores, and hotels. But not the office. Less than 30% of white-collar employees are working at the office on average in 10 major US cities. As a result, businesses in central business districts are largely missing out on the strong economic recovery.
- Across the pond, the UK is delaying lifting its Covid-19 restrictions until July 19, by which time the country aims to have double-jabbed two thirds of the adult population. Prime Minister Boris Johnson says that there are still millions of young adults who have not yet been inoculated against the coronavirus.
- In company news, China continued to dismember Chinese business magnate Jack Ma’s empire, according to Forbes. Already, Ma’s empire is worth half of what it was nine months ago. Beijing is currently doling out some of the most lucrative slices of Ma’s business to new “partners” of its choosing, including one of the most corrupt and financially shaky companies in all of China.
- In other corporate news, FedEx and robotics company Nuro have signed a multi-year agreement to test self-driving vehicles in the package delivery company’s network, starting with a pilot program in Houston.
- Moneyweb reported that the mini boom in local house prices from the lows reached during last April’s hard lockdown seems to be over. According to the latest FNB Property Barometer, year-on-year house price appreciation slowed in May, for the first time in 11 months. The volume of bond applications has also declined.
- However, governments’ significant reduction of interest rates to the lowest in 50 years has opened up a market for the youth who are literally driving this market into a new era. Absa Home Loans, which tracks trends in the property market, reveals that it is the under-35 age group that drove the initial part of the growth after hard lockdown. It is also this demographic that currently contributes more than 50% of activity among first-time home buyers.
- South Africa’s economy is currently projected to get back to pre-Covid-19 levels only by 2022, according to the South African Reserve Bank. However, this may prove to be optimistic as the country enters a third wave of infections and parts of the economy are forced to limit activity. The Central Bank’s projection for 2021 is that our economy will recover about 4%, which is still below pre-Covid levels.
- Regardless of the current home market, the building industry sentiment is more buoyant, with confidence rising to its highest level since the first quarter of 2018. However, this masked the difficult overall environment in the sector. Despite the latest FNB-Bureau for Economic Research (BER) building confidence index revealing a gain from 27 to 39 index points for the second quarter of 2021, more than 60% of industry respondents are still dissatisfied with current business conditions.
- Meanwhile, BusinessTech reported on new data from credit bureau Experian showing the rate at which people default on their loans. This data shows an upward trend in the first quarter of 2021. Surprisingly, South Africa’s most affluent consumer segments continue to be most affected by macro-economic conditions. Experian South Africa’s Consumer Default Index deteriorated from 4.02 in December last year to 4.33 in March 2021, as people struggled to keep up with their payments.
- This comes as South Africa is looking to pin down lower inflation rates for the long term as price pressures appear likely to remain muted. Hilary Joffe from BusinessLIVE reported that this move would make it possible to set lower targets without economic pain. However, economists don’t think the lowering of inflation targets is imminent. Last week, South African Reserve Bank Governor Lesetja Kganyago said that the move is possible, noting that the country’s 3% to 6% target range was still higher than its peers, many of which have lowered their inflation targets in recent years.
- The rand has experienced a 3.9% devaluation since Wednesday’s Fed update – mirroring the dollar’s gain – as it overturned some of the positive momentum it had been achieving on the dollar’s weakness of late. The local currency was trading at R14.25/$ at the time of writing, after threatening the R13.40/$ level on 7 June. Commodity prices also reversed their recent gains slightly since the Fed’s guidance, thus reversing the two major factors supporting the rand in recent months – a weaker dollar and strong commodity prices.
- Sentiment in South Africa’s agriculture industry surged to a new high in the second quarter, supported by expectations of record crop yields and strong commodity prices. An agribusiness confidence index compiled by the Agricultural Business Chamber of South Africa climbed to 75 from 64 in the first quarter. “That’s the highest level since the gauge was started in 2001. Favourable weather conditions that allowed farmers to plant on time and increase area plantings for crops, as well as higher agricultural commodity prices that bolstered farmers’ finances, contributed to better sentiment.”
- Commenting on South African President Cyril Ramaphosa’s recent announcement that the power sector will be liberalised, and news that a majority stake in SAA was set to be sold, Business Unity South Africa Chief Executive Officer Busi Mavuso has said that government – specifically Ramaphosa – has taken a gigantic step in the structural reform agenda. You can read her opinion on these developments here.
- Aspen Pharmacare CEO Stephen Saad said at least two million Johnson & Johnson coronavirus vaccines will be delivered to South Africa within the next fortnight to replace those destroyed in the wake of the contamination scandal at a United States plant. The development will come as a relief to government, as pressure is mounting to speed up vaccination of its citizens in the face of surging coronavirus infections. Global researchers hold a view that countries rolling out their vaccination programmes at “trickle down” rates will be the most vulnerable, as a non-immunised population will allow the virus to mutate more easily.
- In local company news, Naspers has vowed to press ahead with a share swap, saying minority shareholder concerns are being addressed. This voluntary share swap is a bid to reduce Naspers’ weighting on the JSE as well as narrow the discounts at which both Naspers and Prosus shares are trading relative to net asset value.
Sources: Dynasty, BusinessTech, Investopedia, Forbes, The Economist, Wall Street Journal, Business Insider, Reuters, Moneyweb, Private Property, Daily Maverick, etc.