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Interest rate hike on the cards

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A 25 basis point interest rate hike is expected this week when the South African Reserve Bank’s Monetary Policy Committee meets. This would take its policy Repo Rate from 6.5% to 6.75%, and Prime Lending Rate of major banks from 10% to 10.25%.

This call has been made by the Firstrand economic team, which calls the decision a “close call”.

“CPI (Consumer Price Index) inflation, at 4.9% as at September, remained well within the 3% to 6% target range of the SARB,” said John Loos, FNB’s property sector strategist. “However, there is a view that the current SARB focuses on the ‘mid-point’ of the target range, i.e. a desire to see the CPI inflation rate moving as close to 4.5% as possible.”

What creates the “split” among economists as to whether a rate hike will come this week or only early next year is the rand starting to show slightly better performance very recently, and oil prices have come down mildly from the $86/barrel early in October (Brent Crude) to around $66/barrel by 15 November.

“Does the SARB wait for inflation effects from earlier pressures to feed through and dissipate, or does it take action now?” asked Loos.

“From a property market point of view, a rate hike is slightly more ‘dampening’ than an unchanged decision, but the difference in impact between the 2 scenarios is unlikely to alter the broadly ‘softening’ direction of the property market at this stage.’

Potential impact on residential property

On the housing market side, up to Q3 2018 the market continued to move further away from equilibrium (“equilibrium” referring to balance between demand and supply). This is reflected in the FNB Estate Agent Survey’s estimated average time of homes on the market prior to sale, which had been on a rising trend since early-2016, reaching 17 weeks and 6 days by Q3 2018. This is up from 14 weeks and 1 day in Q1 2018, and from 11 weeks and 1 day at the start of 2016.

“At current house price growth rates, a 25 basis point rate hike probably wouldn’t stop the trend towards greater home affordability either,” said Loos. “In October, the year-on-year growth in value of a 100% new loan on the average priced home rose by a mere 1.5%. We calculate that a 25 basis point rate hike would take this growth rate up to 3.3% year-on-year, a rate which still remains below the CPI inflation rate as well as below nominal per capita income growth.

“Therefore, it would take more significant rate hiking at this stage to cause the resumption of a deterioration in home affordability, given currently weak nominal house price growth.

“And with supply relative to demand looking set to remain strong in the existing home market, the recent “flurry” of growth in residential units built (26.8% year-on-year for the 3 months to September 2018 according to StatsSA building stats), looks set to be short lived, the new development sector to be challenged by improving affordability in the existing home market.”

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