Weekend Argus (Saturday Edition)
Homeowners should be grateful for the Reserve Bank’s brief on interest rates
THE SOUTH African Reserve Bank’s approach to interest rates has been a “great plus” for the residential market in recent years, with its modern-day brief being an official consumer price inflation (CPI) target of 3% to 6%.
Even though the brief does not directly target the housing market, FNB household and property sector strategist John Loos says homebuyers and sellers can be grateful for the outcome.
“When the 2007/ 8 global financial crisis hit – along with a global food and oil price inflation shock around that time – CPI inflation headed for double digits, and the prime lending rate rose from 10.5% in mid2006 to 15.5% by mid-2008,” he says.
There was a short, sharp recession, and an over-indebted household sector’s financial stress weighed heavily on the housing and residential mortgage market. This led to significant house price deflation.
But painful as that 2008/9 housing market correction was, Loos says it could have been worse had the country still had the monetary policy regime of the 1980s and 1990s.
“In the late 1990s, prior to inflation targeting, the Reserve Bank’s brief was protection of the internal and external value of the rand. This implied that, when the rand showed significant weakening, the bank was obliged to raise interest rates to attract greater levels of ‘hot money’ capital inflows to stem the tide of rand weakness.”
One such bout of rand weakness took place around mid- 1998, and this saw the bank hike rates by a massive 7.25 percentage points between June 10 and August 28.
“That is extreme, and if such an interest rate shock had befallen the far more indebted South African household sector 10 years later in 2008, the carnage would have been unthinkable.”
Loos says the CPI is a less volatile variable than the rand, and the result was a Reserve Bank that moved more slowly. In 2002, a late-2001 rand shock’s inflation impact led to a milder four percentage point rate hike over almost nine months. From early 2014 to early 2016 it amounted to two percentage points over two years.
“But the appropriateness of monetary policy for the housing market in recent years goes further. The mild 2014 to 2016 rate-hiking cycle, while not hurting the household sec- tor noticeably, served to prevent any thought of a slowly recovering housing market at the time becoming ‘speculative’ or ‘over-exuberant’ again
House price gradual
– as it had been prior to 2008.
“Mortgage lending rates, on average, were at all times in the post- 2008/ 9 recovery period, kept above average house price inflation, making it difficult for speculators or ‘over-exuberant’ investors to take advantage of cheap credit to achieve quick profits through strong capital growth.”
Loos says over-exuberance can set in when house price growth outstrips the lending rate percentage, as it did around 2004.
“The almost zero growth economy of South Africa of late, we believe, justifies the recent real house price ‘correction’ – decline – to continue in the coming years. It is healthy for real house prices to more or less reflect the underlying economic fundamentals, and we believe they are still too high to be reflective of such a structurally weak economy.”
But how the housing market corrects is important to both mortgage lenders and borrowers, and trying to avoid a sharp nominal house price decline which can create a widespread so-called negative equity situation – where homeowners owe more than their house is worth – is important.
“First prize, therefore, is that low single- digit house price growth prevails, positive but below general inflation, which translates into a gradual real house price decline over a lengthy period,” Loos says.
“House price corrections in bygone decades were not always gradual.
“There are no guarantees this time either, but the modern day ‘slow-moving’ bank greatly enhances the possibility of the house price ‘ super-cycle’ correction being a relatively smooth and gradual affair.”