The money and credit statistics released by the Reserve Bank yesterday indicate that while the money supply (broadly measured as M3) is maintaining a satisfactory rate of growth of around 7% per annum on a quarter to quarter basis, credit extended by the banks to the private sector has remained largely unchanged over the past quarter. Not coincidentally, the price of the average home in SA is also largely unchanged over the past year.
It will take an increase in mortgage credit to lift house prices, while it will take an improved housing market to encourage the banks to lend more and for property developers to wish to borrow more. The trends in money and credit supply indicate that short term interest rates are still too high rather than too low to assist the economy to realise its potential output growth. And so policy set interest rates are unlikely to increase any time soon.
The lower level of mortgage interest rates and a significantly lower debt service ratio for the average SA household (See below) still have work to do to revive the housing market and construction activity linked to higher house prices. Perhaps the authorities, now so concerned with employment growth in SA and intending to subsidise employment with tax concessions, should be reminded that house building and renovations are highly labour intensive.
For graphs and tables, read the full Daily View here: Money and credit: Sill growing too slowly for GDP and employment growth