Tuning out the background noise

It is nigh impossible to measure the effectiveness of regulatory interventions on an economy. There are simply too many variables at play to accurately determine whether the particular measure has its desired outcome. A case in point is the use by the Sou

It can also be argued that rate hikes have the desired impact on disposable income, particularly in an environment where individual debt levels are high. But there are so many other economic factors that attribute to the measured changes in GDP growth and price levels to inflation alone would be ill advised.

Consumers might be correct in their belief that they are unjustly targeted by this form of regulatory intervention. It is perhaps time for the central bank to investigate the use of more consumer friendly actions. Some suggest that interest rate interventions which leave mortgage lending rates untouched would serve this purpose nicely.

But what about other legislative interventions aimed at taming consumer activities. To obtain answers to this question, consider the impact of the National Credit Act on two key domestic markets, the market for houses and the market for new passenger cars. Both markets are under significant pressure right now; but it may be too early to determine whether regulation is responsible for this.

New passenger car sales plummet

New passenger vehicle sales have plummeted in the last few months. The latest National Association of Automobile Manufacturers of SA (Naamsa) figures reveal a 14% slump in new car sales in September 2007 compared to the same period last year. It is worrying that the sale of light and medium commercial vehicles, which had shown resilience recently, also declined by 11% and 21% respectively.

The problem is that the tougher lending criteria introduced in the Act coincided with other troubles in the motor industry. Does anyone remember eNatis? This was the costly new vehicle licensing software which went through a disastrous implementation phase resulting in skewed vehicle registration figures. So, initial hiccups in new passenger sales were as likely a result of administrative bungling as of regulatory intervention. Those who argue the latest drop indicates the Act has begun taking effect should also consider the impact of national strikes which have severely hampered the manufacture of new vehicles recently.

Then they must consider the unexpected consequences of the Act. The abolishment of deposit requirements and longer vehicle lease terms opened a window for consumers to purchase new vehicles. Individuals who were previously unable to afford the 10% upfront deposit or the monthly repayments are now able to enter the market with ease.

House prices fall

"What about house prices?" we hear you ask. Is the National Credit Act responsible for the pressure in certain segments of the local housing market? To answer this question we must consider what was happening in the industry prior to the Act being implemented. An honest analysis reveals the housing market was close to the top of its cycle at the time. In other words, house prices were already in trouble when the Act came into effect.

ABSA's latest house price index confirms these trends. "The growth in house price is expected to taper off further towards the end of the year, with average growth for the full year now projected at a level of around 14.5%. Nominal house price growth for next year is forecast at about 10%, mainly as a result of the tightening monetary conditions since mid-2006, as well as slower economic growth expected in the second half of this year and in 2008." So by 2008 real growth in house prices is likely to be less than 4% per annum.

Thus the slowdown in house sales and the decline in house price growth is about more than regulation. The real issue is with affordability which goes hand in hand with the age old economic principle of supply and demand. Wages have not grown in line with house prices and a big portion of the slowdown can thus be ascribed to affordability.

In our view the notion that supply outstrips demand in the domestic housing industry is a bit of a conundrum. The real backlog is for entry level housing with the major portion of this being uneconomical for the private sector to supply. House prices in the sub R500k segment of the market will therefore remain buoyant, with levels of difficulty creeping in at higher levels.

Apportioning blame

This article highlights how difficult it is to measure the effect of legislation on an economy. The National Credit Act has been in operation for nearly four months, and still we have no real indication of its impact. If you keep your ear to the ground you will have heard mutterings about how difficult it is to obtain finance. So we should probably expect more slowdowns in vehicle and house sales as time goes by.

Even so, it is difficult to finger government intervention as the cause for this slowdown. It is just as easy to blame the economic cycle. South Africa is enjoying an unprecedented economic boom that already stretches nearly seven years. Although the stock market is still going strong, consumers are starting to feel the effects of their spending habits. A slowdown in the market for consumer goods is inevitable.

Editor's thoughts:
South African consumers have experienced their fair share of economic intervention in recent years. We tend to forget about the positive results of the FAIS Act and other financial regulatory intervention and focus instead on the negatives around rising interest rates and the National Credit Act. Do we pay too much attention to economic interventions like interest rate hikes and consumer legislation? Send your comments to gareth@fanews.co.za