The South African Reserve Bank (SARB) announced today that its policy repo
interest rate would rise by 50 basis points, after a brief pause at the January
Monetary Policy Committee (MPC) Meeting. This implies unchanged prime overdraft
rates for major banks.
With CPIX inflation near 10%, and this rate hike signalling the seriousness with
which the SARB takes its inflation targeting job, we are definitely not out of
the “danger zone” yet with regards to risks of further rate hikes.
As such, it is advisable to proceed with caution when involving oneself in
home-buying, buying in a price range well-within one’s means. Scenario planning
to allow for the possibility of further interest rate hiking would be a good
practice.
The news is negative from a residential property market performance point of
view. Whereas we had expected rates to move sideways for the entire 2008, a
scenario which I believe would have led to a gradual recovery in residential
demand as from mid-year, such a recovery has in all probability been delayed
considerably, and it will take substantially longer for household confidence to
start recovering.
I believe that today’s development begins to raise the possibility of a small
period of national house price deflation, which under a sideways rates scenario
I believe would have been narrowly avoided.
When splitting up the market by price category, I believe that the combination
of rate hiking and high food price inflation will bring the superior performance
of the lower-priced end to a close. Lower income groups face the “double-whammy”
of rising interest rates as well as high food price inflation. Food price
inflation affects lower income households worse because it consumes a higher
portion of their total income.
Strongly holiday property-driven areas are probably also in for a more torrid
time until such time as the interest rate cycle clearly turns.
The total impact on home loan repayments since the start of rate hiking in 2006
is now becoming more than significant.
On a R1million house the cumulative impact of 450 basis points worth of hikes is
an increase in the monthly repayment value by R3,184.
Every event brings good news, however, and the good news in this case is for the
rental market and existing landlords. FNB’s rental property barometer has
already been pointing towards a recovering rental market, and I believe that in
the current environment of uncertainty and negativity the resumption of rate
hiking will be an additional boost for rental demand.
Many potential first time buyers would probably want to delay buying, continuing
to be tenants for a little longer, while buy-to-let-buying will probably
deteriorate further on the news, constraining the supply of new rental stock.
The combination of constrained supply and strengthening rental demand is a great
recipe for rental market recovery, and I believe that 2008 will see a
considerable widening in net income yields on letting property stock.