Interest Rate Review (The Bugle)

The South African Reserve Bank’s (SARB) monetary policy committee met last week to discuss the state of play of the South African economy and make a decision on its policy repo rate interest rate. The decision was to keep this key rate at 5% which means that the prime interest rate charged by South African banks remains at 8,5%. This is good news for those who are servicing mortgage bonds as your monthly repayments will remain the same. Gill Marcus, Governor of the SARB, described the economy as fragile and vulnerable to changes in the exchange rate of the Rand, Business and Consumer confidence, local Industrial action and international variables such as the US Federal Reserve policy on quantitative easing. Did you know that the exchange rate of the Rand has depreciated by 57% against the US Dollar over the past three years? Surely we should be experiencing an upsurge in offshore interest in our residential properties? With prime homes along our Dolphin Coast priced in dollars now 57% cheaper, this represents incredible value. The Rand:Dollar exchange rate is around 10.12, the Rand: Pound rate around 16.41, and the Rand: Euro rate approximately 13.66. While a depreciating Rand could tempt purchasers of our local residential properties who are basing their decisions in dollars, pounds or euros to buy, the negative aspects of a depreciating Rand impact on our local inflation rate through more expensive imports, including the price of oil which touches almost every part of our economy. Our current consumer price inflation (CPI) rate is at 5.5%. The producer price inflation rate is 6.7%. For those with a keen interest in the property industry you should keep your eye on these rates as we know that a substantial move in the CPI above 6% would prompt the SARB to increase interest rates, and in turn the cost of servicing mortgage bonds. So what is the SARB forecast for CPI inflation for the next two years? They expect inflation to average 5.8% for 2013, 5.7% for 2014 and to edge down to 5.4% in 2015. If these forecasts turn out to be accurate, we can expect our interest rates to remain flat over this two-year period.

It is good to know that the price of money will remain the same, but what about is availability? Mortgage extension growth in South Africa as a whole is less than 3%. This is particularly low and indicates that the banks are not as yet easing their credit policies to substantially increase lending on mortgages. If you are a seller, this means that you are unlikely to see much price escalation in your home. It is only where we can see a shortage of certain stock levels of property, that substantial increases in the pricing become evident, due to basic economic supply and demand forces.

According to the RMB/BER business confidence index, which measures the outlook of businesses in the economy, we are currently at a ten-year low. The manufacturing sector took a hit in the third quarter with Industrial action claiming a 27,9% decline in the production of motor vehicles, parts and accessories. This has far reaching consequences and is the type of shock to the economy we would like to avoid.

So what is an astute property investor to make of this? Buy while there is plenty of bad news around, and equally be ready to sell when euphoria sets in.

(Author: Andreas Wassenaar, published in The Bugle, 27 Nov 2013)