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

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.