Absa - Outlook

Inflation is currently under upward pressure on the back of volatility in international oil prices and the rand exchange rate, which caused domestic fuel prices to increase sharply in recent months.

The drought conditions and devastating fires which recently occurred in some agricultural region around the country are expected to push food price inflation to higher levels in the near future. These trends do not bode well for overall inflationary pressures over the short term, especially taking into account that food has a weighting of as high as 25,7% in the overall CPIX index.

In view of inflation expected to rise further in coming months, together with factors such as the continued strong growth in domestic credit extension; increasing household debt levels and debt servicing costs; and a substantial current account deficit, the risk for interest rates over the short term, according to Absa, is on the upside.

Against this background, nominal house price growth is forecast to average 13,1% (7,2% in real terms) in 2007, compared with a growth rate of 15,3% (10,2% in real terms) recorded in 2006.

In 2007, the housing market will to a large extent be driven by the combined effect of a wide range of factors, such as the availability and cost of serviced land for residential development; building cost increases and inflation trends; interest rate movements; the overall performance of the economy; growth in the real disposable income of households; trends in household debt levels (which will, together with interest rate developments, influence the cost of debt servicing); and the affordability of housing.
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