No fes­tive cheer as the repo rate is hiked amid slow­ing econ­omy, claim ex­perts

Weekend Argus (Saturday Edition) - - PROPERTY - SATUR­DAY

THERE will be a lit­tle less to cheer about this fes­tive sea­son fol­low­ing the Re­serve Bank’s Mon­e­tary Pol­icy Com­mit­tee ( MPC) lat­est an­nounce­ment that the repo rate is hiked by 25 ba­sis points from 6 per­cent to 6.25 per­cent, with the base home loan rate up from 9.5 per­cent to 9.75 per­cent.

“With in­fla­tion within the tar­get range and a slug­gish econ­omy strug­gling to re­gain im­pe­tus while the coun­try ex­pe­ri­ences the worst drought in decades, the MPC’s de­ci­sion to fur­ther in­crease the repo rate by an­other 25 ba­sis points was ill-timed, as a stable rate would have helped boost busi- ness and con­sumer con­fi­dence at a time when it is needed most,” says Dr An­drew Gold­ing, chief ex­ec­u­tive of the Pam Gold­ing Property group.

“A stable repo rate would have sent a pos­i­tive sig­nal to the 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.

“The year end is usu­ally a pre­cur­sor to a pe­riod when peo­ple tend to make de­ci­sions re­lated to ca­reer and life­style choices for the year ahead, giv­ing rise to property transac- tions as they more or less in­vest in new prop­er­ties.

Al­though he says the rate hike was not un­ex­pected, Se­eff chair­man, Sa­muel Se­eff be­lieves that it is poorly timed.

“In view of the poor eco­nomic per­for­mance, a hold on the rate would have been a vi­tal boost for the fes­tive sea­son, an im­por­tant pe­riod for the re­tail sec­tor. The MPC could then have hiked the rate at the next meet­ing at the end of Jan­uary, says Se­eff.

“This rate hike is un­likely to do much to im­prove the value of the rand and is likely to fur­ther slow the econ­omy. The in­crease means that home­own- ers with 20-year hous­ing loans of around R1 mil­lion will have their monthly re­pay­ment in­creased from R9 787 to R9 959.

“Al­though we ex­pect the hous­ing mar­ket to ab­sorb the hike, there will no doubt be an im­pact. At least one fur­ther in­ter­est rate hike is al­most cer­tainly set to fol­low in the new year. It also looks likely that Fe­bru­ary’s bud­get will bring more cost hikes in­clud­ing the pos­si­bil­ity of a VAT hike along with in­creases in the cost of ba­sic util­i­ties such as elec­tric­ity.

“All of this will no doubt af­fect ex­ist­ing home­own­ers and prospec­tive buy­ers who will have to keep their house­hold bud­gets in check next year,” says Se­eff.

Mike Gre­eff, chief ex­ec­u­tive of Gre­eff Prop­er­ties an af­fil­i­ate of Christie’s In­ter­na­tional Real Es­tate, says the rise in the repo rate is re­gret­table, but not en­tirely un­ex­pected.

“Cer­tainly the rise in in­ter­est rates will stretch house­hold bud­gets and af­fect those al­ready strug­gling to pay off home loans. How­ever, with stock still low there is enough de­mand to keep the property mar­ket tick­ing over.

“Any­one pay­ing off a home loan should try to in­crease the min­i­mum re­pay­ment, even by a few hun­dred rand a month. This de­creases the in­ter­est por­tion, re­duces the time it will take to pay off the loan, and acts as a so­phis­ti­cated saving mech­a­nism with fi­nance avail­able at a cheaper rate than a new loan would be,” says Gre­eff.

The de­ci­sion to raise the rates has been on the cards for some time, with cur­rent eco­nomic con­di­tions leav­ing the Re­serve Bank lit­tle choice, says Adrian Goslett, re­gional di­rec­tor and chief ex­ec­u­tive of RE/MAX of Southern Africa.

“With the US dol­lar strength­en­ing over the rand in the last two weeks and the US Fed­eral Re­serve ex­pected to raise its rates at their next meet­ing, econ­o­mists had pre­dicted that the South African Re­serve Bank would fol­low suit and hike rates by at least 25 ba­sis points. Con­cerns that the weak­ness of the rand would af­fect in­fla­tion had econ­o­mists ex­pect­ing that the Re­serve Bank would raise the rates to coun­ter­act the ef­fects.

“How­ever, while a higher rate could mit­i­gate the in­fla­tion pres­sure, an ex­ces­sive rate will slow eco­nomic growth and place more pres­sure on prospec­tive property buy­ers and home­own­ers.”

The MPC’s de­ci­sion to­day to raise in­ter­est rates by 0.25 per­cent is re­gret­table, says John Smyth di­rec­tor of Multinet Mort­gages bond orig­i­na­tion com­pany. He expects it may have a neg­a­tive ef­fect on the res­i­den­tial property mar­ket where price growth coun­try­wide this year has al­ready dropped to about 6 per­cent and where growth next year is likely to be as low as 4 or 5 per­cent.

Smyth says he has found over the years that the psy­cho­log­i­cal im­pact of even small in­ter­est rate rises has a marked damp­en­ing ef­fect on the con­fi­dence of less so­phis­ti­cated in­vestors and bond ap­pli­cants.

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