US Imbalance makes and high risk growth strategies

1. Prospects for Residential Property2009 and beyondSome positive signs emerging, but the global economic crisis keeps the 2009 outlook uncertain

2. "Owners of capital will stimulate the working classes to buy more and more expensive goods, houses and technology, pushing them to take more expensive credits, until debt becomes unbearable.. The unpaid debt will lead to the bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to Communism. "Karl Marx, 1867.

3. US Imbalance makes and high risk growth strategies

4. Real oil prices were near 1979/80 shock peak. Self-correcting mechanism has kicked in

5. SA imbalance also raises concern, but fortunately the party hasn’t quite as long

6. Global and domestic growth prospects look bleak in near term

7. Background InformationImportant recent trends in the property and mortgage market - most data still points to weakening, but certain fundamentals starting to improve.

8. By quarter 3 2008, year-on-year decline in new residential mortgage loans granted was still in excess of -30% • New loans granted fell by -30.04% year-on-year in Q3 2008. • September monthly figure suggested some possible move towards stabilizing.

9. Completions and Plans passed on a declining trend

10. The house price index still shows a deteriorating trend, but this is a co-incident indicator • If one uses a house price index, a declining trend is still observed. • -4% year-on-year deflation in January 2009. • But a house price index is a“co-incident” indicator, as house price trends are the result of the inter-action between demand and supply.

11. The 4th Quarter FNB Residential Property Barometer shows early hints of better times ahead

12. Activity Levels Residential Property Confidence Indicator

13. The pace of year-on-year decline subsiding • Seasonality may have played a role in Quarter 4 activity level rise. • But year-on-year percentage change also shows an improvement – or at least significantly less deterioration. • Year-on-year percentage change eliminates any seasonal effect.

14. Average time on the market falls • From a peak of 20 weeks and 1 day, Q4 2008 saw the average time on the market fall significantly to 15 weeks and 3 days.

15. A slightly smaller percentage of sellers had to drop their price • From 88% in Q3, the percentage of sellers selling at less than asking price declined to 81%.

16. Proportion of first time buyers increases in Quarter 4 2008 • First time buyers were reported to have become a more significant part of the market in the fourth quarter. • As a percentage of total buyers, first time buyers made up an estimated 17% in Q4 2008, compared to 12% in the previous quarter.

17. But buy-to-let market shows no improvement • The buy-to-let market showed no sign of turning for the better. • As a percentage of total buyers, buy-to-let buyers made up a smaller estimated 12% Q4 2008, compared to 14% in the previous quarter.

18. 2-bedroom market and less suffers on the back of lack of buy-to-let and 1st time buying interest

19. 3-bedroom market believed to be a more stable “established family” market

20. Downscaling due to financial pressure still the biggest reason for selling, but no noticeable change occurred in Q4 2008 • Downscaling due to financial pressure remained unchanged as a percentage of total selling at 26%.

21. Reasons for selling properties • Downscaling due to financial pressure, at 26% unchanged from the previous quarter, is the single most important driver of selling. • Emigration at 14%, is the second most important along with downscaling due to life stage.

22. Are these slightly better numbers a sign of things to come or just a false dawn?

23. Negative Factors Influencing a Weak Market • The long list of negatives for housing may be shortening • Rising household debt-to-disposable income ratio. • Rising interest rates. • Rising Inflation eating into disposable income. • Slowing global economy negatively impacting on a slowing local economy. • Eskom’s negative impact on sentiment. • Heightened nervousness amongst minorities caused by a change in the ANC leadership at Polokwane. • The Zimbabwe Crisis and SSA’s weak handling of it – seemingly protecting Mugabe. • Are we in for abnormally high levels of election violence, due to a more competitive election? Rising debt service ratio?

24. But Positive signs are emerging • A list of positives is emerging: • The start of a declining household debt-to-disposable income ratio. • Interest rate cuts. • Lower commodity prices has brought the peak in CPIX inflation income. • Eskom much improved (possibly with the help of a slower economy). • After a period of major change, the ANC can now move forward to create more certainty on future policy, AND THE SKY HASN’T FALLEN ON OUR HEADS. • Real political opposition to enforce better government delivery??? Declining debt service ratio?

25. Emigration selling subsiding? • 14% of sellers were estimated to be selling to emigrate in Q4-2008, down from 20% previous. • Minority groups may be becoming accustomed to the ANC leadership changes. • Global downturn makes moving abroad less attractive.

26. Inflation and interest rates have begun to turn • Fall in global commodity prices has started to lower CPIX inflation. • First interest rate cut in December 2008, and steady reduction expected to follow through 2009. • Re-weighted CPI figure expected to be sharply lower as from January data-point.

27. With prime rate change turning down, it can be expected that new mortgage demand will start to rise • Good inverse correlation between change in prime rate and change in new mortgage loans granted

28. Despite weak growth, the debt-service ratio decline is expected to continue as household sector cuts back on borrowing ratio • Downscaling due to financial pressure remained unchanged as a percentage of total selling at 26%.

29. The gap between nominal disposable income growth and consumer inflation could start widening in 2009 • Nominal disposable income growth expected to decline in early-2009 due to weaker discretionary remuneration, investment income and job loss. • Partly countering the negatives is expected to be higher wage inflation in 2009 as wages play lagged catch-up to consumer inflation. • Consumer inflation expected to decline at a faster rate than nominal disposable income growth.

30. Real disposable income growth expected to be weak but positive in 2009 • 1.5% real disposable income growth forecast for 2009. • 5.1% real disposable income growth forecast in 2010 as economy recovers somewhat. • Real economic growth not expected to be a driver but rather steadily declining inflation keeping ahead of declining nominal disposable income growth.

31. Affordability turns for the better

32. New vs existing house price gap widening Data source: Absa

33. Yields declined throughout the boom years

34. SARB Leading Indicator at -14.3% in November 2008, suggesting more economic growth slowdown to come

35. Business confidence remains weak, a good indication of weak economic growth in the near term • Low business confidence is likely to remain for some time, on the back of the global economic crisis and its negative impact on SA’s export-driven sector. • Real Economic growth of only 0.7% is forecast by RMB for 2009, after an estimated 3.2% for 2008. • In 2010, a recovery in economic growth to 3.3% is expected on the back of lower domestic interest rates. • Data source: Bureau of Economic Research

36. Manufacturing and mining set to be the weakest links • Continuation of the Investec Purchasing Manager’s Index at levels below 50 spells contraction in manufacturing, and negative growth for this sector is expected in 2009. • Mining production and profitability also expected to be hit by the fall in commodity demand and prices. • Data source: Bureau of Economic Research

37. Residential markets with high manufacturing exposure may experience higher risk in the near term • Ekurhuleni, Mandela Bay and eThekwini residential markets may be at higher risk due to the regions’ higher exposures to manufacturing. • Data source: Global insight

38. Gradual recovery in residential and new mortgage demand as 2009 progresses • -25.6% year-on-year decline in the value of new loans granted for 2008 estimated. • -5.3% decline forecast for 2009. • Return to positive year-on-year growth anticipated only in H2 2009, although quarter-on-quarter growth expected to turn positive in H1 2009.

39. Positive house price inflation only expected to resume in 2010 • In many areas, house price deflation has been a reality for some time, and on a national basis the FNB House Price Index turned negative in 2009. • While demand is expected to gradually recover as the year progresses, oversupplies of property may take a while to mop up. • Therefore, average deflation of -4.9% is forecast in the FNB House Price Index for 2009.

40. L-Shaped Recession means trouble some years down the track

41. House Price Trends

42. Metro area house prices head towards deflation • 0.7% year-on-year average house price inflation was recorded for the Metro areas • By December, on a monthly basis, price deflation had probably set in

43. Top end of Metro Markets appears to be levelling out while all other categories head lower

44. Coastal Holiday Towns have dropped sharply from their lofty peak

45. Low volume townships show highest capital growth – but events are catching up with them too

46. Cape Metro House price deflation sets in – 0.2% y/y in 4th quarter

47. Cape Metro Price trends – Former Coloured areas following a more “suburban” than township cycle Notes: Data used to calculate above-mentioned house price series is from the Deeds Office, and includes only transactions done by individuals Attempts are made to exclude areas deemed to be commercial of industrial nodes Quarterly data are smoothed using a Hodrick-Prescott smoothing function

48. The FNB Residential Property Barometer shows early signs of property demand strengthening. The household sector’s debt situation has begun to improve as interest rates start to decline and the debt-to-disposable income ratio follows a downward path. Emigration selling appears to be subsiding. The big negative factor for residential property in 2009, though, will be the weak global economy and its negative impact on economic growth via SA’s export-driven sectors. Property regions heavy on manufacturing and mining have additional risks to contend with in the near term. Residential and new mortgage loan demand are expected to recover gradually as 2009 progresses. However, there is still a lot of “financial stress” selling as well as Sales in execution, creating something of an oversupply, and it could be some time before this oversupply is mopped up. As a result, national house price inflation is only expected to resume in 2010. Outlook Summary

49. The End