Special Report Podcast: John Loos - household and property sector strategist, FNB - Boardroom Talk with Alec Hogg

Special Report Podcast: John Loos - household and property sector strategist, FNB - Boardroom Talk with Alec Hogg

ALEC HOGG: It’s Monday January 9 2012 and in this Boardroom talk special podcast, John Loos from FNB, joins us. The Property Price Index is one of the areas that many people keep an eye on but you do it for a living, John.

JOHN LOOS: I enjoy it, Alec, I must say, it’s one of the more cyclical sectors, so it’s gives an economist much entertainment along the way.

ALEC HOGG: Things looked okay in 2010, we were actually moving in the right direction but that seems to have come off the rails a little.

JOHN LOOS: Yes, not entirely surprising, Alec, if you look at the big stimulus behind 2010, globally there were huge interest rate cuts by the US Federal Reserve, a lot of QE1 and QE2 a little bit later. So, big stimulus packages to get the world economy out of recession. That brought our economy out of recession too, we had big interest rate cutting in 2009 and so really the property market…that mini recovery in 2010 tracked the global and local economic recovery and now it’s tapered off, it’s flattened out just like the world economy.

ALEC HOGG: So what was the bottom line in 2011?

JOHN LOOS: Well, 3.1% house price growth on average. That’s down from the 6% growth of 2010. In real terms that would be negative, given that inflation is probably going to be closer to 5% for the year. So, yes, very flat, negative real house price growth and I think it’s a reflection of weak economic times, the lack of interest rate stimulus and a household sector that’s still highly indebted and needs to rebuild the balance sheet.

ALEC HOGG: Sounds like we had our double-dip in the housing market.

JOHN LOOS: Well, not quite, yes, I guess you could possibly call it a double-dip if you take real house price declines as a double-dip. But it’s pretty normal in property markets to get that…after a big slump you get what they call a relief recovery, that was 2010 and then you go into a long period of stagnation as a lot of the excesses get sorted out, the oversupplies in the property market, the household sector indebtedness. So, it’s nothing abnormal and the big cycle in residential property is probably 15 to 20 years on average. We’re only about 13 years into it, so there’s probably a few years to go of this stagnant behaviour.

ALEC HOGG: Give us a better idea on that, John, if you would. You did say a long cycle, if we’re 13 years in and it’s 15 to 20 years, are we saying then another seven years of gloom?

JOHN LOOS: Well, yes, 20 would probably be the outer limit in most cycles but yes, I’d say somewhere between the 15 and 20 years. When I believe that property will be ready to do well again is probably after the next interest rate hiking cycle, whenever that may occur. So that’s probably still a few years away, we’ll go through something of a rate hiking cycle and then the next…after that when interest rates are cut again I think by that time the household sector will have rebuilt its balance sheet and be able to respond more positively in terms of residential demand to the stimulus.

ALEC HOGG: If I’m reading you properly then, the earliest one can expect things to start improving in the housing market would be around 2015?

JOHN LOOS: I think that’s at least what it would take and especially if you look at what’s happening in the world economy, which affects us, and how long it might take to sort out some of its excesses, I think at least 2015, the latter half of the decade looking for some sort of decent recovery.

ALEC HOGG: So, John, if you’re holding on to a house in the hope that in some point in time you’ll be able to sell it off, perhaps it’s best just to take your medicine now?

JOHN LOOS: Yes, I never like to tell people to sell, it’s probably a bad time if you don’t have to sell but if you’re under financial pressure and you’re holding on for some sort of imminent recovery, I have my doubts. I think it’s a good few years away or a good few years of very flat performance.

ALEC HOGG: So, if you are a buyer on the other hand, no need to rush.

JOHN LOOS: No need to rush, we’re about 17% down in real terms from the real price peak in early 2008, so it has become a better buyer’s market. But my perception is that residential yields on average are still relatively low and that the best buying opportunity and the best investment opportunity, if you’re looking for yield, is probably still a few years away.

ALEC HOGG: That’s interesting, so you’re not even suggesting that it’s a good time to buy for rent?

JOHN LOOS: Well, not the best time. As I say, I think it’s improving, I think rental growth is probably outpacing very weak house price growth and that would mean that I believe yields are probably widening on average. It’s always difficult to time the bottom of a cycle but no, I think the best buying opportunity for the property investor who buys an income stream is probably a few years off.

ALEC HOGG: You also have at FNB a Valuers Market Strength Index, what does that mean?

JOHN LOOS: Well, every time a valuer of ours does a property valuation we ask them to rate demand and supply in the market in that area. It’s a very simple one, good, average or weak and we give a number rating to each. Then what we do to determine the market strength index is we subtract the supply rating from the demand rating. I’ve calculated on a scale of nought to 100 very similar to a Purchasing Managers Index, I guess, and the level of 50, below 50 means that the supply rating is higher or stronger than the demand rating. Since 2008 it’s been consistently below 50, which means that it’s a relatively over-supplied market according to the valuers as a group.

ALEC HOGG: So, it’s still a buyer’s market in other words, you get a better deal if you’re a buyer if that index is below 50 and where is it at the moment?

JOHN LOOS: It’s down at about 44 or so. So, yes, that’s as I say 50 would be the break-even where demand would be equal to supply and it’s been consistently below that.

ALEC HOGG: Has it been worse than 44?

JOHN LOOS: No, last year was the worst it’s been. So, yes, unsurprisingly we’ve resumed real house price decline.

ALEC HOGG: Again, if I’m reading you correctly, that doesn’t mean that the worst is behind us, in fact it could still be ahead.

JOHN LOOS: Absolutely Alec, a lot of the housing market’s fortunes have to do with the world economy. If you’re a Nouriel Roubini double-dipper of sorts then you would think that significantly worse has to come. Now it’s tough to call a recession or a Great Depression or whatever certain people are predicting but I think the global economic risks are very high, we know what’s going on in Europe and I don’t believe that the US is out of its troubles yet, you can’t just borrow and spend your way to recovery. So, there are a lot of risks in the world economy, the risks of further recessions over the next few years I think are very significant and yes, therefore I think the downside risks to local residential property are also very significant.

ALEC HOGG: And all of those have knock-ons, as you’ve just explained, in South Africa.

JOHN LOOS: Absolutely, the world economy affects us; our exports from this country are near to 30% of GDP in value. So, we’re an open economy, we are highly exposed to what happens in the world.

ALEC HOGG: That’s the bigger picture, it’s not terribly exciting but when you look specifically at 2012 is there anything we need to look out for there?

JOHN LOOS: Well, I’m assuming some sort of very slow positive growth carrying on…like we have in the last few quarters, perhaps just above 1%. Slow economic growth for this year and slow nominal house price growth, I’ve penciled in about 2%. That’s lower than an inflation assumption of nearer to 5%, CPI inflation that is. So, another real house price decline I believe for this year but slight nominal house price growth.

ALEC HOGG: If it’s only 2%, as you mentioned earlier it was 3% in 2011, so we aren’t just bumbling along the bottom, we might even, in real terms, be sliding a little.

JOHN LOOS: Yes, I think more slide in real terms is…that’s my expectation. Housing markets struggle to…it would take a more serious economic crisis to warrant a nominal house price decline. One tends to find, in the housing market, resistance to dropping prices; I think it’s got to do with the nature of the beast. Housing investment for many people is the biggest investment they’ll ever make and so they are incredibly resistant to dropping prices. So that’s why you see a lot of the correction in housing markets happens in real terms, I guess it’s the inflation illusion, the CPI inflation illusion that causes it but people are much more reluctant to drop their prices in nominal terms.

ALEC HOGG: John, often black swans arrive, things come out of the ether to either surprise us positively or negatively, what would it take to turn all of these trends on their heads? What would it take to actually push the housing market up again?

JOHN LOOS: Alec, I think what’s needed and I’m thinking like a macroeconomist now, can’t get away from that and I think what we need fairly soon is a very significant drop in certain commodity prices globally and the one obviously being the oil price. At current levels one feels that that must put significant pressure on the world’s biggest oil guzzler, being the US. If one had a very significant commodity price slump I think that’s what would be needed to avert a serious global economic slowdown and possibly even start some sort of global economic recovery, better economic growth times for us and therefore possibly a better housing market performance. But failing that and if we carry on with very mediocre economic growth I don’t think the SARB can realistically cut interest rates aggressively, we might get one or two more minor reductions this year, that’s not going to make a big difference and the household sector really needs to reduce its debt/disposable income ratio. So, it can do that either by very strong economic and disposable income growth or failing that it just has to cut back on the spend and reduce the growth in borrowing and de-leverage that way.

ALEC HOGG: And where are we on the debt/disposable income ratio?

JOHN LOOS: Well, round about 75%. That’s down from, if I remember, around 83% when we started at the all time peak in early 2008, so it’s been slow going in reducing that ratio and that’s normally the case when you’ve got slow economic growth. If we had the rapid economic growth of China or if we just had 5% or 6% economic growth, which we had a number of years ago, you could probably see that ratio declining faster but the reality is we’re hovering just above 1% economic growth, so you don’t grow your way away from high debt ratios easily.

ALEC HOGG: And where would we need to get to before conditions are correct for another housing boom?

JOHN LOOS: Well, that’s debatable but I think to be comfortable we’ve got to be significantly below 70%, I think down into the low 60s and we’d probably find a household sector that’s a lot more comfortable and a lot more ready to accelerate its borrowing growth once the stimulus comes again and the stimulus would be the next round of interest rate cutting, after the next round of interest rate hiking I believe.

ALEC HOGG: So that’s some years off, your advice for people right now?

JOHN LOOS: Well, it’s always difficult to say now is a good time to buy or now is not a good time to buy, there’s no perfect timing. It’s becoming a better time to buy but I think what’s more important is if people are buying property is to think about the following, firstly interest rates always do go up, it’s almost as certain as death and taxes and our typical interest rate hiking cycle has been four to five percentage points, if you look at the last two. So, you’ve got to make provision for a significant number of rate hikes when they ultimately do come that would be prudent. Then secondly it’s very important to take into account the very significant cost hikes being imposed on us by municipal rates and all the utilities, with Eskom leading the charge, it’s going to be a lot more expensive to…or those are going to be a lot more expensive in years to come. So, one needs to buy well within your means to allow for those very significant cost increases in future.

ALEC HOGG: John Loos is the household and property sector strategist at FNB.

The PODCAST of this interview can be downloaded on the MONEYWEB website.


Denny Crane

Denny Crane
It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!