According to Dr Andrew Golding, the CE of Pam Golding Property group, the Monetary Policy Committee’s (MPC) decision to raise the repurchase rate (repo rate) is ill-timed.
“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,” explained Golding.
Peter Attard Montalto, a research analyst at Nomura, noted that while expected, the 25 basis point (0.25%) rate hike was a surprise.
John Loos, household and property sector strategist at First National Bank (FNB) Home Loans, pointed out that the repo rate increase will lead commercial banks to raise their prime rates to 9.75%
Household debt
According to Loos, the decision for the SARB to gradually hike the repo rate is good for consumers as it can assist in correcting certain macroeconomic imbalances.
Loos believed that the current 77.8% household debt-to-disposable income ratio is too high. By lowering household indebtedness, the household sector will be less vulnerable should future economic or inflation/interest rate increases arise.
Furthermore, Loos highlighted: “Lowering consumption expenditure, containing borrowing growth, and raising savings, as tough as it may be, would be our suggestion for many regardless of whether interest rates rise further or not.
“The reality is that a weaker global and domestic economic performance has slowed net wealth growth in recent quarters, and it is important that the weak level of South Africa’s household savings be adjusted accordingly, to compensate for a possible lack of asset price growth looking forward.”
The impact on the property market
Golding noted that the rate hike, in conjunction with several other contributing factors, will start to have an impact on the property sector.
“With municipal tariffs such as rates, electricity and water receiving increasing attention, we anticipate as the new year unfolds the trend towards the containment of such costs and conservation of our precious natural resources will further stimulate the growing demand for convenient sectional title living and use of energy saving features. Although generally smaller in size, although not necessarily cheaper, sectional title offers low overheads and improved security. This is coupled with the growing trend towards urban living in proximity to the workplace,” stated Golding.
Attie Anderson, head of business lending at FNB Property Finance, noted: “Commercial property investors will be negatively affected due to a decrease in consumer spending, which will impact them directly if they are trading from the property, or indirectly if their tenants suffer as a result of the interest rate increase.
“Moreover, this could lead to tenant vacancies or rental arrears, and may even force investors to reduce their rent in order to prevent tenants from vacating and seeking more affordable rentals.”
The decision to raise the repo rate
According to Montalto, the MPC’s decision to hike the repo rate revealed some new things to the market. One of these was that it was expected that external risks would be the mitigating factor leading to a rate hike. However, during his speech, Lesetja Kganyago, Governor of the SARB, pointed to domestics factors being a driving force.
“While growth and (headline) inflation forecasts fell slightly it was the upside risks and inflation ‘fear’ narrative that won out, alongside the upward revision to the core inflation forecast and the external factors. ZAR is clearly still an issue of concern, a reinforced one because of the moves since the last meeting, but less FOMC (Federal Open Market Committee in the United States) related,” noted Montalto.
Loos added: “Some years of Rand weakness, with possible second round inflationary effects, were mentioned in the MPC statement as an upside inflation risk, along with sharp electricity tariff increases and possible drought-related food price increases. The SARB also remains concerned with high average wage increases.”
For more information on the repo rate increase, click here.