2016 is shaping up to be an expensive year for South Africans. Just three months into the new year consumers have been hit by an interest rate hike; ‘sin’ taxes and the fuel levy have been increased; Eskom has been awarded a 9.4% tariff increase; SANRAL is raising its fees just in time for Easter; the drought is pushing up food prices and DSTV announced it will increase its fees from the beginning of April. Of course the cost of everything else such as school fees, medical aid, banking and gym fees have also gone up in price.
Unfortunately, it is widely believed that the increases will keep coming. While some increases such as the Eskom increase are now ‘fixed’ for the year, others such as the interest rate and food prices aren’t. Most economists are of the view that the interest rate will be increased again during the course of the year with a view to containing inflation. The price of food is also expected to increase significantly in line with low crop yields, the weak Rand and electricity and commercial water increases.
Worryingly, many South Africans are already struggling to make ends meet as evidenced by numbers released in February by Neil Roets, CEO of Debt Review. According to Roets, Debt Review has seen a 120% jump in applicants seeking protection from creditors by going under debt review since the start of 2016.
It’s a fairly bleak picture and one which has sparked the ire of many, including the National Union of Metalworkers of SA (NUMSA) which is now considering legal action in the wake of Eskom’s increase.
NUMSA’s general secretary Irvin Jim said that the union was “outraged” as the Eskom increase would hit working class consumers hard who were already struggling with increased school, transport and food prices. Jim added that many businesses would face closure and that many more would start retrenching. By way of example he cited the Chamber of Mines which has warned that Eskom’s price increase could lead to the loss of 40 000 jobs.
From a broad property market point of view, industry experts have largely indicated that the increases will dampen sentiment and affect demand to an extent. Property price growth is likely to remain in the single digits and first time buyers will probably battle to access mortgages without sizeable deposits.
Industry commentators have also said that many homeowners will also probably choose to renovate and refurbish their existing properties as opposed to moving house which entails prohibitive costs.
A note recently released by FNB’s Household and Property Sector Strategist John Loos indicates that this may not necessarily be the case. While home maintenance and upgrades have improved from their 2008/9 levels, Loos says that a rising interest rate environment, along with deteriorating economic growth which is putting disposable incomes under pressure may lead to weakening levels of home investment.
Specifically, in a weak “but not stressed” environment as we are in at the moment, Loos says that consumers may cut back on non-essential or luxury expenditure items and “value adding upgrades’ which arguably fall into this category.
He adds that a decline in value adding upgrades would not be a major concern. What would be more of a concern he says is if the economic environment weakened considerably further to a state where there is a significant rise in financial stress, which in turn could translate into a deterioration in the levels of ordinary home maintenance.
Loos adds that rising electricity costs will also bolster the case for ‘green’ homes and alternative energy and that the rising cost of living will accelerate the trend towards smaller, more affordable homes which began in the 1970’s.
Commenting broadly on the issue of rising taxes, Loos also cited the ‘Laffer Curve’ which hypothesises that increasing tax rates beyond a certain point will be counter-productive for raising additional tax revenue. The way things are going, South Africa may well reach a point where such a theory plays out.
It’s not all doom and gloom though. Most analysts agree that there is still a fair amount of demand for ‘well-priced’ homes and those which fall into the R1,2m bracket. Certain pockets, estates and suburbs such as Sandton will of course largely continue to hold their own and opportunities aplenty also exist for cash buyers on the lookout for bargains.
The upshot is that for the foreseeable future, times are going to be tough and if you haven’t done so already, now’s the time to batten down the hatches, trim expenses where possible and avoid taking on unnecessary debt.