Interest rate KO – homeowners down for the count?
Yesterday’s Monetary Policy Committee meeting saw the repo rate hiked by 25 basis points, pushing it up from 6% to 6.25%. This means the base home loan rate is now 9.75% (from 9.5%).
The residential market is split in its opinion on the rate hike, with all the major agencies bemoaning the increase, while the financial sector says, in the long run, it is the right approach.
“While not unexpected, [yesterday’s] hike is poorly timed,” says Seeff chairman, Samuel Seeff. “In view of the poor economic performance, a hold on the rate would have been a vital boost for the festive season, an important period for the retail sector. The MPC could then have hiked the rate at their next meeting at the end of January.”
He says the rate hike is unlikely to do much to improve the value of the rand and is likely to further stem the economy, with bonded homeowners seeing an almost R200 increase in their monthly mortgage repayments (on a R1m loan).
Likewise, Dr Andrew Golding, CE of the Pam Golding Property group, says that with inflation in the target range and a sluggish economy struggling to regain impetus while the country experiences the worst drought in decades, the Monetary Policy Committee’s decision to further increase the repo rate was ill-timed. He notes that a stable rate would have helped boost business and consumer confidence at a time when it is needed most.
“A stable repo rate would have sent a positive signal to South Africa’s housing market which, despite ongoing economic headwinds, continues to experience sustained demand which in many key nodes and metros exceeds the supply, resulting in ongoing stock shortages,” he says. “The year-end is usually a precursor to a period when people tend to make decisions related to career and lifestyle choices for the year ahead, giving rise to property transactions as they relocate and/or acquire new property investments.”
Gary Sacks, GM for HomeBid, says the timing of the rate increase is a pity as it’s the festive season and many people won’t be getting bonuses, while there are price increases expected in many sectors.
“The ‘feel-good factor’ in the country is already low, and it will definitely impact the property market,” he says. “But with HomeBid only charging 1.95% commission we will be able to assist buyers and sellers with significant savings for homebuying and selling.”
Household debt remains too high
Household sector credit growth remains low, something that it is important for the bank to keep that way. This is according to John Loos, household and property sector strategist at FNB Home Loans.
“While this is not a core focus of the bank, the gradual interest rate hiking is assisting in keeping this growth at a snail’s pace, and that in turn helps the debt-to-disposable income growth rate to continue its gradual declining trend,” he says. “We view the 77.8% household debt-to-disposable income ratio as still being too high. Lower household indebtedness will ultimately mean a less vulnerable household sector should later economic or inflation/interest rate shocks arise.”
The 4.3% household sector credit growth rate in September was still slow, but it has been rising mildly since a low of 3.2% year-on-year back in May, according to FNB. “Another interest rate hike will hopefully contain this growth, translating into further debt-to-disposable income ratio decline,” says Loos, noting that “normalising” interest rates was key to healthy functioning of not only the South African, but many other countries’, residential property markets. “Property bubbles across the world have been driven largely by cheap credit. Withdrawing this massive stimulus in an orderly way should serve to keep irrational behaviour in the housing market contained.”
Adrian Goslett, CEO of RE/MAX of Southern Africa, says the Reserve Bank faces the challenge of balancing inflation pressure while not stunting growth. “It is expected that there will definitely be further rate increases during the course of 2016,” he says. “Prospective property buyers, along with those who currently own property, should prepare for this by tightening the reigns on their spending habits and building a savings reserve. While those with high debt levels will be adversely impacted by a hiking cycle, those who have saving in place will benefit greatly.”
Property economist, and advisor to low-commission estate agency HomeBid, Neville Berkowitz, says homeowners and potential homeowners must be financially responsible and ensure that they can afford to buy a home if interest rates do rise, as expected, by up to 2% per annum in the foreseeable future. “With real home prices not expected to rise nationally in the near term, with a few exceptions of certain ‘hot’ locations, deciding to continue renting and building up one’s capital reserves may be a wiser move for those on the financial edge; especially those who may not be able to financially manage an interest rate increase of up to 2% per annum,” he says. “Homeownership is not for everyone and forcing your strained budget to squeeze the last drop into paying a monthly bond, and causing one sleepless nights and ill health, is not recommended.
“Be financially responsible and anticipate an increase of up to 2% per annum in the foreseeable future.”
Why expect interest rate increases of up to 2% p.a. – Berkowitz
Yesterday’s interest rate increase of 0.25% per annum is a proactive move by the Reserve Bank anticipating a 0.1% to 0.25% per annum increase in interest rates by the Federal Reserve in the US during December this year. However, in my view, I foresee that we are looking at an interest rate increase of between 1% to 2% per annum during the next 12 to 18 months. The emerging economies including the BRICS are going to see increased outflow of foreign funding as global investors are going to go for safety first and head for the US and Eurozone with their funds.
Japan has slipped into a recession and China’s changed policies of developing its local consumer spending at the expense of continuing its investment in infrastructure spending has made emerging economies supplying commodities much weaker.
In South Africa, household names of certain previous corporate giants in the commodities marketplace are looking like they may be heading for near insolvencies. Increasing interest rates will be the only way to entice foreigners to keep funding South Africa’s large current account deficit, mainly due to excessive government spending on a bloated public sector, unbridled corruption and fraud where billions in tax payers’ money continually goes missing, or is misspent without any accountability.
The current South African media stories portraying President Jacob Zuma in a poor light simply provides more fuel to the fire as foreign media picks up the trend and adds its own voice to the worsening governance position of South Africa. This frightens off foreign investors and foreign loan providers.
The uncertainty of the successor to President Zuma also makes foreign funders uneasy and the proven financial and leadership skills of Cyril Ramaphosa will allow foreign funders to sleep better at night if he is the chosen successor.
Tax collections will suffer as the economy slows down further in 2016 and this places more reliance on the need for foreign loan funding.
With all this uncertainty it becomes a vicious cycle of having to keep increasing interest rates to appease foreign funders of our capital account to fund our current account deficit.
Hopefully next year’s local government elections will see a positive change to a more responsible and capable local authority in each of the major municipalities around South Africa. These moves should appease foreign funders, helping to keep a lid on further interest rate rises.