Prospects for Residential Property

2009 and beyond

Some positive signs emerging, but the global

economic crisis keeps the 2009 outlook uncertain

"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.

US Imbalance makes and high risk growth strategies

US Current Account vs US Interest Rates

-7

-5

-3

-1

1

3

5

7

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

%

-10

-8

-6

-4

-2

0

2

4

6

8

10

Bo

nd

yield/T

B R

eal Rate - %

US Current account as % of GDP US Real 3-month TB rate

US 5-year Government Bond

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

kicked in

Brent Crude Oil - Real $/Barrel

0

10

20

30

40

50

60

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

$/b

arre

l

Real brent crude - $/barrel

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

Current Account as Percentage of GDP

-10

-7

-4

-1

2

5

8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

% o

f G

DP

-15

-10

-5

0

5

10

15

%

Current account balance (% of GDP) Real 3-month BA rate

Global and domestic growth prospects look bleak in near term

Key Composite Leading Indicators

-15

-10

-5

0

5

10

15

Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

Yea

r-o

n-y

ear

% c

han

ge

RSA USA

Background Information

Important recent trends in the property and mortgage

market - most data still points to weakening, but certain

fundamentals starting to improve.

New loans granted fell by -30.04% year-on-year in Q3 2008.

September monthly figure suggested some possible move towards stabilizing.

By quarter 3 2008, year-on-year decline in new residential mortgage loans granted was still in

excess of -30%

New residential mortgage loans andre-advances granted

-40

-20

0

20

40

60

80

100

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

%

Value of new residential mortgage loans and re-advances granted onresidential properties - y/y % change3-month moving total - y/y % change

Completions and Plans passed on a declining trend

Growth in Square Metreage of Residential Building Plans Passed vs Completed

-30

-20

-10

0

10

20

30

40

1996 1998 2000 2002 2004 2006 2008

%

Total square metres of residential buildings completed - 4Q movingaverage - y/y % change

Total square metres of residential building plans passed - 4Q movingaverage - y/y % change

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.

The house price index still shows a deteriorating trend,

but this is a co-incident indicator

FNB Average House Price Inflation

-10%

0%

10%

20%

30%

40%

Jan-02 Jan-04 Jan-06 Jan-08

-2%

0%

2%

4%

6%

8%

FNB House Price Index - year-on-year percentage changemonth-on-month % change (Right axis)

The 4th Quarter FNB Residential Property Barometer

shows early hints of better times ahead

Activity LevelsResidential Property Confidence Indicator

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.

The pace of year-on-year decline subsiding

Rate of Change in Activity Levels

-30%

-20%

-10%

0%

10%

2005 2006 2007 2008

%

Demand Activity Levels - Year-on-year percentage change

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.

Average time on the market falls

Average time that a property is on the market

2

6

10

14

18

22

2004 2005 2006 2007 2008

Wee

ks a

nd

Day

s o

n t

he

Mar

ket

From 88% in Q3, the percentage of sellers selling at less than asking price declined to 81%.

A slightly smaller percentage of sellers had to drop their price

Proportion of properties sold at less than asking price

10

30

50

70

90

2004 2005 2006 2007 2008

%

Percentage of properties sold at less than asking price

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.

Proportion of first time buyers increases in Quarter 4 2008

First time buyers as a percentage of total buyers

5

10

15

20

25

30

35

2005 2006 2007 2008

%

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.

But buy-to-let market shows no improvement

Proportion of buyers buying to let

5

10

15

20

25

30

2004 2005 2006 2007 2008

%

Percentage of total buyers buying to let

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

The Market For 2 Bedrooms and Less

-10%

0%

10%

20%

30%

40%

50%

2002 2003 2004 2005 2006 2007 2008

Freehold - 2 Bedrooms - y/y %Sectional Title less than 2 bedrooms - y/y %Sectional title - 2 bedrooms - y/y%

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

The 3 Bedroom Market

-10%

0%

10%

20%

30%

40%

2002 2003 2004 2005 2006 2007 2008

Sectional Title 3 Bedrooms - y/y % Freehold - 3 Bedrooms - y/y %

Downscaling due to financial pressure remained unchanged as a percentage of total selling at 26%.

Downscaling due to financial pressure still the biggest reason

for selling, but no noticeable change occurred in Q4 2008

Downscaling due to Financial Pressure

8

12

16

20

24

28

Q4-2007 Q1-2008 Q2-2008 Q3-2008 Q4-2008

%

Percentage of total sellers downscaling due to financial pressure

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.

Reasons for selling properties

Reasons for selling (As % of Total Sales)Total High Net

Upper income

Middle income

Lower income

Downscaling due to financial pressure 26% 17% 25% 28% 37%Downscaling with life stage 14% 17% 14% 13% 13%Emigrating 14% 16% 16% 12% 13%Relocating within SA 7% 8% 7% 6% 8%Upgrading 9% 9% 8% 9% 10%Moving for safety and security reasons 10% 11% 10% 12% 5%Change in family structure 14% 15% 15% 13% 11%Moving to be closer to work or amenities 5% 7% 4% 6% 4%

Are these slightly better numbers a sign of things to

come or just a false dawn?

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?

Negative Factors Influencing a Weak Market

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???

But Positive signs are emerging

Declining debt service ratio?

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.

Emigration selling subsiding?

Emigration Selling

0

4

8

12

16

20

24

Q4-2007 Q1-2008 Q2-2008 Q3-2008 Q4-2008

%

Percentage of total sellers selling in order to emigrate

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.

Inflation and interest rates have begun to turn

Inflation vs Interest Rates

0

5

10

15

20

25

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

%

CPIX inflation (y/y%) Prime overdraft rate (% p.a.)

Good inverse correlation between change in prime rate and change in new mortgage loans granted

With prime rate change turning down, it can be expected that new mortgage demand will start

to rise

New residential mortgage loans vs Prime Rate

-40

-20

0

20

40

60

80

100

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

%

-50

-40

-30

-20

-10

0

10

20

30

40

%

Value of new residential mortgage loans and re-advances granted onresidential properties - y/y % changePrime rate - y/y % change

Downscaling due to financial pressure remained unchanged as a percentage of total selling at 26%.

Despite weak growth, the debt-service ratio decline is expected to continue as household sector cuts

back on borrowing ratio

Household Debt to Disposable Income vs Debt Service Ratio

5

7

9

11

13

15

1985 1988 1991 1994 1997 2000 2003 2006 2009

%

40

50

60

70

80

%

Household debt-service ratio (Left Axis)

Household debt-to-disposable income ratio (Right Axis) - year-on-yearpercentage change

Fore-cast

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.

The gap between nominal disposable income growth and consumer inflation could start widening in 2009

Gap between Nominal Disposable Income and Consumer Inflation

0

4

8

12

16

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Percentage point gap between nominal disposable income growth and consumer inflation

Nominal household disposable income - y/y % change

Consumer Inflation (using HCE Deflator) - y/y % change

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.

Real disposable income growth expected to be weak but positive in 2009

Real Disposable Income Growth

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Real Household disposable income - Estimated y/y % change

Forecast

Affordability turns for the better

Affordability of housing

60

80

100

120

140

160

2001 2002 2003 2004 2005 2006 2007 2008

Ind

ex Q

3-20

00=

100

Average-priced house repayment value/average income index (2000=100)

Average house price/average income ratio (Index 2000=100)

New vs existing house price gap widening

Average price of new vs existing houses

0

200 000

400 000

600 000

800 000

1000 000

1200 000

1980 1984 1988 1992 1996 2000 2004 2008

Ran

d

-20

-12

-4

4

12

20

28

36

%

%difference Existing New Data source: Absa

Yields declined throughout the boom years

Housing Yield Index vs Long Bond Yields

20

40

60

80

100

120

140

160

1970 1975 1980 1985 1990 1995 2000 2005

0

4

8

12

16

20

%

Average Rental/Average House Price Index(2000=100)Government Bond Yields - 10 years and over (%)

Raw datasources: SARB, Absa,

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

SARB Leading Business Cycle Indicator

-15

-10

-5

0

5

10

15

20

25

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08

%

SARB leading indicator - y/y % change

Real Economic Growth

-2

0

2

4

6

8

1998 2000 2002 2004 2006 2008

%

Real GDP year-on-year % change

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.

Business confidence remains weak, a good indication of weak economic growth in the

near term

RMBBER Business Confidence Index

0

20

40

60

80

100

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

RMBBER Business Confidence Index

Data source: Bureau of Economic Research

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.

Manufacturing and mining set to be the weakest links

Investec Purchasing Managers Manufacturing Index

40

45

50

55

60

65

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Investec Purchasing Managers' Index

Data source: Bureau of Economic Research

Ekurhuleni, Mandela Bay and eThekwini residential markets may be at higher risk due to the regions’ higher exposures to manufacturing.

Residential markets with high manufacturing exposure

may experience higher risk in the near term

Metros - Manufacturing as % of Total GDP - 2007

0%

5%

10%

15%

20%

25%

30%

35%

Ekurhuleni NelsonMandela Bay

eThekwini Johannesburg Cape Town Tshwane

Data source: Global insight

-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.

Gradual recovery in residential and new mortgage demand as 2009 progresses

Growth in value of New Residential Mortgages and Re-Advances

-40

-20

0

20

40

60

2002 2003 2004 2005 2006 2007 2008 2009 2010

Value of new residential mortgages granted - y/y%Quarter-on-quarter percentage change

Forecast

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.

Positive house price inflation only expected to resume in 2010

FNB Average Annual House Price Inflation

10.4%

18.8%

29.5%

24.7%

12.2% 11.2%

5.2%7.2%

-4.9%

-10%

0%

10%

20%

30%

40%

2002 2003 2004 2005 2006 2007 2008 2009 2010

FNB House Price Index - Annual percentage change

Forecast

L-Shaped Recession means trouble some years down the track

House Price Inflation under 3 scenarios

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

2002 2004 2006 2008 2010 2012

y/y

% c

han

ge

U-Shaped RecessionL-shaped recession with deflationary environmentL-shaped recession with high inflation environment

House Price Trends

• 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

Metro area house prices head towards deflation

Major Metros Average House Price Inflation

-10%

0%

10%

20%

30%

40%

Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008

Major Metros - Year-on-year percentage change

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

Major Metro House Price Inflation By Area Price Category

-10%

0%

10%

20%

30%

40%

50%

Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008

Top 10% Metro Suburbs - Year-on-year percentage changeHigh income areas - Year-on-year percentage changeMiddle income areas - Year-on-year percentage changeAffordable areas - Year-on-year percentage change

Coastal Holiday Towns have dropped sharply from their lofty peak

Coastal Holiday Towns vs Major Metros Average House Price Inflation

-10%

0%

10%

20%

30%

40%

50%

Q1-2000 Q1-2001 Q1-2002 Q1-2003 Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008

Coastal Holiday Towns - Year-on-year percentage changeMajor Metros - Year-on-year percentage change

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

Major Provinces' Township Average House Price Inflation

-10%

0%

10%

20%

30%

40%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Yea

r-o

n-y

ear

%

-3%

-1%

2%

4%

6%

8%

10%

12%

Qu

arter-on

-qu

arter %

Major Metro Townships - Year-on-year percentage change

Major Metro Townships - Quarter-on--quarter percentage change

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

FNB CAPE METRO HOUSE PRICE INDEX

-10%

0%

10%

20%

30%

40%

Q1-2000 Q1-2002 Q1-2004 Q1-2006 Q1-2008

-2%

0%

2%

4%

6%

8%

10%

CAPE METRO - YEAR-ON-YEAR PERCENTAGE CHANGE

CAPE METRO - QUARTER-ON-QUARTER PERCENTAGE CHANGE

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

CAPE METRO AVERAGE HOUSE PRICE ESTIMATESDate 2003 2004 2005 2006 2007 2008 Q3-2008 Q4-2008Cape-Town-Fishoek-Simonstown 462,636 649,230 830,472 955,142 1,057,910 1,144,072 - - y/y % change 33.5% 40.3% 27.9% 15.0% 10.8% 8.1% - -Gordons Bay-Strand-Somerset West 405,857 567,769 744,351 909,128 1,037,201 987,192 - - y/y % change 27.6% 39.9% 31.1% 22.1% 14.1% -4.8% - -Milnerton-Melkbosstrand 364,644 515,478 673,959 753,767 813,607 801,535 - - y/y % change 28.5% 41.4% 30.7% 11.8% 7.9% -1.5% - -Goodwood-Belville-Parow-Kuilsriver 364,620 489,486 660,225 782,420 845,608 824,003 - - y/y % change 25.1% 34.2% 34.9% 18.5% 8.1% -2.6% - -Cape Metro Former Coloured Areas 98,383 115,785 150,136 209,022 270,723 290,806 - - y/y % change 10.6% 17.7% 29.7% 39.2% 29.5% 7.4% - -Khayelitsha-Gugulethu 90,779 90,872 94,352 107,935 139,869 185,545 - - y/y % change 11.1% 0.1% 3.8% 14.4% 29.6% 32.7% - -Brackenfell-Kraaifontein-Durbanville 305,098 417,017 588,989 720,243 803,817 786,662 - - y/y % change 26.9% 36.7% 41.2% 22.3% 11.6% -2.1% - -Cape Metro 366,997 507,332 661,979 773,742 858,643 890,287 889,810 881,846 y/y % change 30.3% 38.2% 30.5% 16.9% 11.0% 3.7% 2.3% -0.2%

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

The End