Reserve Bank Governor Gill Marcus’ 18 September announcement that keeps the prime lending rate unchanged at 9.25% is good news for home buyers – but it carries with it an implied caution.
This is the general mood of two of the country’s major property franchises: Rawson Property Group and RE/MAX of Southern Africa.
In her review of the economy at home and globally, Governor Marcus said that we can expect a “slight near-term improvement in the inflation outlook” in this final quarter of the year, but that, despite this and the expectation of a relatively stable inflation rate, the Bank’s Monetary Policy Committee “is concerned that the forecast remains uncomfortably close to the upper end of the target band”.
Inflation and other factors
While inflation is its primary focus, she said, “the MPC is also mindful of the anaemic state of the domestic economy, rising unemployment and the downside risk to its growth forecast. Domestic expenditure has deteriorated further, particularly private sector fixed capital formation, and, together with continued moderation in household consumption expenditure, is indicative of the lack of demand pressures in the economy.”
In his reaction to the announcement, Adrian Goslett, CEO of RE/MAX Southern Africa, said that pressure to increase rates had eased as a result of a fall in the consumer price index in the period since the MPC’s meeting in July.
While food and fuel prices rose during the first nine months of this year, “food price inflation is gradually easing and is expected to continue to fall,” he said.
“The same can be expected of the petrol price, which will bring about some relief for cash-strapped households.”
Easing pressure for 2015
He said that a lower inflation rate at the end of 2014 will also ease pressure on the Reserve Bank to increase rates during 2015.
“The CPI inflation had climbed from 5.3% year-on-year in November 2013 to 6.6% by June this year. The climb prompted the Monetary Policy Committee to push rates up by 75 basis points during this period. Economists predict that although the CPI inflation rate has already seen a decline, it is expected to fall further and re-enter the inflation target set by the Reserve Bank.”
Goslett said that “consumers and potential property buyers should use this period of steady rates to continue to focus on reducing their levels of interest-bearing debt in order to show higher levels of disposable income. Those who currently own property should try to pay the extra money into their bonds to reduce their loan period as well as the capital amount owed.”
Less overspending
Chairman of the Rawson Property Group, Bill Rawson, said that “the general opinion among those who comment regularly on the South African economy seems to be that an interest rate hike is not needed now because the South African consumer, increasingly prevented by the National Credit Act and the banks from overextending his debt, is now slightly less likely to overspend. This, in turn, could lead to a slight reduction in South Africa’s foreign debt and balance of payment situations.”
He said that the decision to keep the interest rate unchanged will help the property sector to continue “turning over satisfactorily.”
The effect on your bond
Rawson pointed out that an increase of just 0.25% in the interest rate translates to an extra R162 per month on a R1-million bond, and he made the point that even such a relatively small increase in monthly payments, “can demoralise those already struggling to meet their bond commitments.”
In the light of the prevailing economic conditions, he said, it’s still too early to extend easier credit to home-owners, “because the average South African household’s consumer debt today is still equal to 70% plus of their annual income.”
Rawson said that sales in the R5-million to R15-million bracket remain flat, but that there are “encouraging signs” that they’re beginning to improve.
“Here again,” he said, “keeping interest rates down will prove helpful.”
Download the 18 September statement from the Monetary Policy Committee of the South African Reserve Bank here.