Repo rate increase – time to establish a financial buffer
In a surprise move the Reserve Bank’s Monetary Policy Committee (MPC) decided to increase the repo rate by 25 basis points to 6.25 per cent and the prime rate to 9.75 per cent last week.
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This latest increase is the third in little over a year – effectively raising the rate by a cumulative 0.75 per cent – and further increases are expected during 2016.
Bruce Swain, MD of Leapfrog Property Group, said while the decision to raise the repo rate was not unanimous (four members voted for the increase while two preferred to maintain the status quo), it was taken in what the bank describes as pre-emptive action to contain fallout from the drought, the effect of jumpy rand and to contain inflationary pressures.
“While the increase was not totally unexpected it will certainly place more pressure on consumers, we don’t believe that it will have an immediate impact on the residential housing market – buyers who need a place to live will continue to buy and business will go on as usual,” said Swain.
* Good for the property market?
John Loos, Household and Property Sector Strategist at FNB Home Loans, is of the opinion that the rate hike wasn’t a bad move as it discourages housing speculation.
“Prime Rate is above the average rate of house price inflation, implying a positive real rate should one adjust Prime Rate to a real rate using the FNB House Price inflation rate.
“This implies little room for speculation in the housing market by speculators wishing to use cheap credit to make a quick capital gain. Rapid capital growth just isn’t there at the moment.
“From a Household Sector Credit growth point of view, too, there has been no urgent reason to hike interest rates.
“Household Sector Credit growth measured 4.3 per cent year-on-year in September, which is probably still below Nominal Household Disposable Income growth, and should thus translate into further near term decline in the all-important Debt-to-Disposable Income Ratio”.
Loos mentioned that the Household debt- to- Disposable Income Ratio is still far too high at 77.8 per cent and that the domestic savings rate remains too low.
“Viewing the Household Sector, a Net Dissavings rate means that their level of gross saving is insufficient to cover the depreciation on the fixed assets that they as a group own, let alone sufficient to create wealth.
“There exists a need to contain the Current Account Deficit, or otherwise put for South Africa to begin to live within its means.
Swain said all in all, it is believed the MPC will continue to raise the repo rate through 2016 in an attempt to curb inflation.
“While the increases remain small at the moment, it is imperative for both buyers and sellers to curtail their spending in order to save as much as possible,” said Swain.
“Apart from a gradual interest rate hike we’ve got increasing electricity and food prices to look forward to as well as the ailing economy.
“It is critical for home owners and buyers to establish as much of a financial buffer for themselves as possible.
“That being said, investment in property remains a good move – as long as buyers factor the increases mentioned into their budgets.”
Tighten the belt: Repo rate hike shocks homeowners