South Africans losing their homes due to high repo rate

South Africans are losing their homes due to high interest rates while the South African Reserve Bank (Sarb) hesitates to cut the repo rate.

Many consumers were expecting a bigger repo rate cut after inflation decreased over the past five months and were not impressed with the Reserve Bank’s cut of only 25 basis points last week.

Renier Kriek, managing director of Sentinel Homes, describes Sarb’s hesitation as unethical and unjustifiable. “This is despite inflation dropping to 3.8% in September and to 2.8% in October, well below the Sarb’s midpoint target of the range between 3% and 6%.”

Before the latest cut he said if the Sarb fails to announce a rate cut of at least 50 basis points, its decision-makers should take ethical responsibility for the undue hardship placed on South African consumers.

He says the Sarb’s Monetary Policy Committee (MPC) keeps reminding South Africans that it is bound to its inflation-targeting mandate, focused exclusively on inflation and nothing else. “It determines compliance with that mandate by using its so-called ‘model’ which, to the public, is a black box completely opaque to outside scrutiny.”

ALSO READ: Repo rate cut too small to help SA consumers who cannot afford food

Statistical model for repo rate vast simplification of economy

Kriek says these statistical models are always an approximation and vast simplification of the economy, which is an immensely complex system, especially when it comes to inflation and its interplay with other economic variables.

“No matter which factors or variables the Sarb’s econometricians employ, the model must always include largely subjective judgement calls. In addition, inflation targeting is a relatively new paradigm, first introduced in New Zealand in 1989 and implemented by South Africa in 2000. Now, it is assumed to be gospel although it is not universally adopted by the world’s central banks.”

Even if you take the MPC at its word, Kriek says, inflation has been dropping steadily and is below pre-pandemic levels and well below the midpoint of Sarb’s target band. “If it does indeed follow only the inflation targeting mandate to the exclusion of all other considerations, the Sarb’s MPC should be cutting the interest rate aggressively.”

If inflation targeting employs an increased interest rate to dampen spending and thereby bring price increases down, then it has already achieved this outcome, Kriek says. “Yet, in reducing the rate by a mere 25 basis points in September 2024, the Sarb left South Africans facing continued and avoidable economic challenges.”

ALSO READ: Reasons for repo rate cut of only 25 bps not convincing – economist

Consumers are losing their homes due to high repo rate

In the greater context, he points out, consumers are losing their homes and are under immense financial pressure, with food prices increasing by 50% over the past four years. “Poorer South Africans cannot afford to feed themselves or their children properly and they are facing food insecurity and malnourishment at alarming rates.”

He ascribes this to the fact that jobs are not created and the gross domestic product (GDP) is not growing as it would have if the real interest rate were lower. “The property industry is seeing growth among those in the top 30% of income earners, although there is low demand in this segment because banks are flooding that market with relatively easy money to offset the growing rate of home loan defaults.”

The National Credit Regulator’s previous Consumer Credit Market Report indicated that 92 to 93 % of home loans were typically not in arrears, which means that 7 to 8% were in arrears.

However, Kriek says, recent data from the second quarter of 2024 reveals that only 87.8% of home loans are paid up to date, which means that partial or full non-payment has increased to 12.2%, an increase of more than 50% in homeowners missing payments.

“The resulting loss of homes and other properties can be directly attributed to the high interest rate. We must realise that the high interest rate does not lead only to direct pressure, in the form of a high instalment for the individual homeowners, but also has indirect effects. The opportunity cost of maintaining an overly cautious monetary policy is having a significant effect on our economy.”

ALSO READ: Reserve Bank cuts repo rate by only 25 bps despite economists’ call for 50

South Africans under assault from factors beyond their control

Kriek warns that South Africans are under assault from factors outside their control, such as foreign conflicts and economic disruptions that affect import and export costs and opportunities, with the country’s commodity exports especially hard hit.

He adds that there is also uncertainty about how the incoming Trump administration might affect inflation in Africa.

“Therefore, the country has a small window of opportunity presented by current low inflation, where a reduced interest rate could stimulate the economy and bring some relief to its citizens in the form of economic growth, fixed capital formation and job creation to ease our dizzying levels of unemployment and economic hardship.”

Kriek says the MPC is not bound to its regular announcements but can make extraordinary adjustments to the interest rate as it did during Covid, should the fears of upward pressure on inflation prove warranted.

“This means it can immediately reduce the interest rate and if any risks suggested by the model happen, simply increase them again when and if necessary.

“The Sarb’s cautious and conservative approach to monetary policy is no longer beneficial to anyone and it is time to consider an alternative path forward. Why continue giving the patient bitter medicine if the illness is healed? The possibility of a future illness is not a good enough reason.”