Stable interest rates: Good or bad? 26 Nov 2013 The Reserve Bank’s Monetary Policy Committee (MPC) last week left the repo rate unchanged, citing upside risks to inflation given the potential for further rand depreciation on future tapering in the United States Quantitative Easing (QE) programme, versus slowing domestic economic growth. “The current low interest rates, which have remained the same since July 2012, have not resulted in any significant decline in the household debt to disposable income ratio (now at around 74 percent) or improvement in the household savings ratio,” says Rademeyer. However, this comes as no surprise as Investec had pointed out earlier that week that Interests rates were set to remain unchanged. Furthermore, Investec had said it does not foresee an increase this year and 2014. Following the announcement, Investec’s Annabel Bishop says they continue to believe interest rates will remain unchanged this year and next, with the risk that economic growth comes out weaker than forecast, and so demand led inflation pressures moderate further. “When tapering of quantitative easing in the US begins, which we currently expect will be in March 2014, we believe the Rand will not weaken as dramatically as it did when the potential for future QE tapering was mentioned in the middle of this year as the speculative positions which had been built up in the absence of any signals of QE tapering have to a substantial degree been unwound.” She says emerging market currency weakness is likely, but not to the extent as in mid-2013 as the market has to a substantial degree priced in a reduction in QE. Seeff Properties issued a statement saying Stable rates are good for the property market, saying that homeowners should invest their annual bonuses and any spare cash into their home loans, something that will stand them in good stead to weather future interest rate hikes. Samuel Seeff, chairman of Seeff Properties says the continued stringent mortgage lending criteria simply does not support an noteworthy increase in the volume of home loans granted, something that is vital to boost home buying and sales volumes. Also, he notes that low rates have done little to stimulate economic growth and have certainly not encouraged wholesale property buying. What should buyers read into this? Shaun Rademeyer, chief executive officer of BetterBond home loans cites disappointment at the MPC’s decision to leave rates unchanged. If anything, he was expecting that the Reserve Governor, Gill Marcus might see her way clear to making a rate cut, “even if it was a drop of only 25 or 50 basis points, to give the economy and the property market a psychological boost before the holiday season. He notes that inflation is expected to remain below the 6 percent upper target for the rest of this year and next, and economists are predicting that there will actually be no further interest rate movements now until 2015. “However, this stability is likely to come at a cost to prospective home buyers.” Rademeyer says between trying to reduce their debts and trying to cope with ever-higher transport, food, medical, education and electricity costs, they are not likely to have much disposable income left over in the coming year to either save for a deposit or afford a bond repayment. “The current low interest rates, which have remained the same since July 2012, have not resulted in any significant decline in the household debt to disposable income ratio (now at around 74 percent) or improvement in the household savings ratio.” He points out that first-time buyers may have to defer their home buying plans, which will take a lot of the impetus out of the market – and out of the economy as a whole because of the ripple effect that home buying and building has on many other sectors. Existing homeowners will get no relief on their monthly bond repayments now, but they have been given another opportunity to pay any extra income, such as a 13th cheque, into their home loan account and build up a buffer against future interest rate increases, he explains. FNB household sector and property strategist John Loos says stable rates are well positioned so as not to promote a spree of speculative buying or other such unhealthy behaviour explaining that they ascertain this by calculating an alternative real prime rate through using average house price inflation (instead of the usual CPI-adjusted measure). Given average home lending rates not far from prime rate these days, when prime rate exceeds house price growth it is tough to borrow money in order to buy and sell properties on a short-term basis and make a significant profit, and so speculative behaviours will be well contained. “Should house price growth accelerate to levels significantly above prime rate, the environment starts to become more favourable for speculators, which can lead to unhealthy bubbles forming.” Loos points out that prime rate is still above house price growth, according to FNB estimates suggesting that home buying should still be largely for the right reasons and FNB’s indicators pointing to high levels of primary residential demand and low buy-to-let demand suggest that this is the case. Meanwhile, Adrian Goslett, chief executive officer of RE/MAX of Southern Africa warns that buyers who do not take the opportunity to buy now will miss out as he reckons interest rates will increase in 2014, which will put slightly more pressure on those with already high-debt-to-income ratios. “Growing demand for property has also pushed property prices up, with some regions seeing prices far beyond what was seen during the boom and in terms of affordability, buyers could soon find themselves in a similar situation as they did during the boom period,” he says. Although some buyers have the cash, the majority of the South African population is dependent on obtaining home loan finance. “With this in mind, it is expected that the predicted rate increases during 2014 will impact on both the affordability levels of buyers wanting to enter the market as well as existing homeowners with bonded properties,” says Goslett. He says buying property is all about timing, if buyers take long to enter the market, they will find themselves paying a premium in a market hit by stock shortages. It’s not all doom and gloom though, and according to Dr Andrew Golding, chief executive of Pam Golding Properties, given the stable, low interest rates, the current market still presents sound buying opportunities for buyers across the various price sectors. He notes that the housing market has been characterised by significant demand in the affordable housing sector (between R400 000 and R800 000), which also provides opportunities for investment with sound capital growth potential. Golding says first-time buyers can look to sectional title developments as they offer good value for money pointing out that a well-run complex in a good area can offer an excellent return on investment over the medium to long term, coupled with the fact that they involve lower maintenance. Although the unchanged interest rate will continue to aid cash-strapped consumers looking to buy property, and will be a relief to consumers over the holiday period, there are tough times ahead. Riaan Roos, chief executive officer of the MSP Group, says new homeowners must budget for at least a 1 percent rate hike, as it will not remain unchanged forever. “We anticipate an interest rate hike in the second quarter of 2014.” FNB expects rates stability to continue into 2014 noting that currently, consumers are cautious when taking out new loans and the bank urges consumers to pay off debt before rates increase. The bank offers assistance in the form of a Debt Remedy facility from Home Loans and a Special Repayment Arrangement is offered by Credit Card. Economic growth and inflation The Reserve Bank revised its growth forecast for 2013 down to 1.9 percent year-on-year (y/y) from 2.0 percent y/y, and its 2014 forecast to 3.0 percent y/y from 3.3 percent y/y. The GDP growth outlook in 2015 was revised down to 3.4 percent y/y from 3.6% percent y/y, explains Bishop. Furthermore, she points out that the Reserve Bank revised its inflation outlook slightly lower, reiterating that its forecast remains uncomfortably close to the upper level of the inflation target range. The Reserve Bank has indicated it will hike interest rates if it believes inflation will exceed the target over its forecast period of six to eighteen months, but currently believes inflation is expected to remain within the target range for the entire forecast period, with a peak of 5.9 percent in the second quarter of 2014, says Bishop. – Denise Mhlanga
Posted on: Tue, 26 Nov 2013 08:39:58 +0000
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