Change of tar­get

Gov­ern­ment’s new CPI to ex­change mort­gage costs for rentals

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN

FI­NANCE MIN­IS­TER TREVOR MANUEL might change the tar­geted mea­sure of in­fla­tion from CPIX to CPI next year. The rea­son is that the way in which CPI is cal­cu­lated will be changed to give a more ac­cu­rate mea­sure of to­tal in­fla­tion than CPIX. The change, should it oc­cur, would have ma­jor im­pli­ca­tions for mone­tary pol­icy as the CPI rate won’t fall as sharply as CPIX would have done. That’s some­thing that hasn’t been taken into con­sid­er­a­tion by in­fla­tion bulls, such as In­vestec As­set Man­age­ment’s An­dré Roux and John Stop­ford.

The SA Re­serve Bank’s tar­geted mea­sure of in­fla­tion is called the CPIX rate be­cause it’s the rate of change in the con­sumer price in­dex (CPI) ex­clud­ing the cost of mort­gages. The cost of mort­gages – de­ter­mined by in­ter­est rates – was ex­cluded in the Bank’s tar­get­ing ex­er­cise as in­ter­est rates are used as a weapon against in­fla­tion and it wouldn’t make any sense at all to have in­fla­tion rise when the weapon is used.

How­ever, from next year – when Sta­tis­tics SA un­der­takes its re­vamp of SA’s in­fla­tion fig­ures – CPIX will ef­fec­tively cease to ex­ist. The rea­son is that Stats SA will no longer use the cost of mort­gages as part of its mea­sure of hous­ing costs in the CPI. In­stead, it will use rentals of equiv­a­lent dwellings. Stats SA says a sur­vey of rentals ini­ti­ated by it in 2005 will form the data source for “own­ers’ equiv­a­lent rent” – the new approach to the cost of hous­ing in in­fla­tion.

Stats SA says home­own­ers in­cur two types of costs: the cap­i­tal cost, which cre­ates a fully owned as­set at the end of the mort­gage pe­riod. That isn’t a com­po­nent of the cur­rent cost of liv­ing. The sec­ond cost is the cost of con­sum­ing a hous­ing ser­vice. “This is the op­por­tu­nity cost caused by an owner who chooses to live in his home rather than rent it out. It’s this cost that is re­ferred to as own­ers’ equiv­a­lent rent.”

In the sur­vey that Stats SA will con­duct to de­ter­mine own­ers’ equiv­a­lent rent, real es­tate agents will be the re­spon­dents. A

Mone­tary pol­icy will be af­fected by

a change.

sam­ple of ac­tual rental prop­er­ties is se­lected from the books of a let­ting agency. The amount paid in rent for those prop­er­ties is recorded each quar­ter for as long as the prop­erty is avail­able for rent. Ad­di­tional charges in­cluded in the rental are also recorded to fa­cil­i­tate the track­ing of a pure rental.

In the old CPI, the rentals sam­ple is equally dis­trib­uted over the three ma­jor hous­ing types. In the new CPI its com­po­si­tion will be ad­justed so it rep­re­sents the fact that houses ac­count for the vast ma­jor­ity of owner oc­cu­pied ac­com­mo­da­tion and flats and town­houses for a small share. In fourth quar­ter 2007 and first quar­ter this year 4 601 and 4 303 ob­ser­va­tions were recorded re­spec­tively. But Stats SA in­tends to in­crease its sam­ple size to be­tween 8 000 and 10 000 dwellings over the course of 2008.

What does the change mean for SA’s in­fla­tion rate? Rand Mer­chant Bank econ­o­mist Et­ti­enne le Roux cal­cu­lates there will still be a step down in the rate once the new weight­ings and re­bas­ing are put in place in Jan­uary 2009. But the CPI rate will be higher than the CPIX rate. Le Roux ex­pects the CPI rate to peak at 13,8% in July this year, dip­ping to 9,5% in Jan­uary next year and grad­u­ally mod­er­at­ing there­after. His es­ti­mates of av­er­age CPI in­fla­tion are 11,7% in 2008, 8,1% in 2009 and 6,2% in 2010. The 8,1% av­er­age for 2009 com­pares with a CPIX av­er­age of 7,1% for the same year.

In­vestec As­set Man­age­ment’s (IAM) fore­casts for the CPIX rate for next year were very bullish. IAM head of fixed in­come An­dré Roux says his team didn’t take into ac­count the pos­si­bil­ity Gov­ern­ment might move to a CPI tar­get next year in­stead of re­tain­ing CPIX.

Manuel’s of­fice, ap­proached for com­ment, says: “Im­puted rent and mort­gage in­ter­est costs are dif­fer­ent things. The for­mer is the op­por­tu­nity cost of rent­ing a prop­erty to an owner or the cost of rent­ing. The lat- ter is the cost of bor­row­ing for hous­ing. The new CPI doesn’t in­clude mort­gage in­ter­est costs. Any an­nounce­ment of a change in the in­fla­tion tar­get price in­dex will oc­cur at the time of the medium-term Bud­get pol­icy state­ment (MTBPS).”

The MTBPS usu­ally oc­curs in Oc­to­ber. The ques­tion now be­comes how the Re­serve Bank will con­duct its in­fla­tion fore­casts with­out any of­fi­cial no­ti­fi­ca­tion of a change and in the knowl­edge that CPIX will ef­fec­tively fall away from next year. Hope­fully, some clar­i­fi­ca­tion will emerge when the Bank makes its next mone­tary pol­icy state­ment on 14 Au­gust.

Didn’t take into ac­count a pos­si­ble change in the tar­get. An­dré Roux An­nounce­ment will only come in Oc­to­ber. Trevor Manuel

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