Following the Monetary Policy Committee meeting on 28 January 2016, the South African Reserve Bank (SARB) decided to increase its policy Repo rate by another 50 basis points, bringing the Repo rate level to 6.75%, which implies that the Commercial Banks will adjust their Prime rates to 10.25%.
In the current cycle, which started in January 2014, this translates into a cumulative rate hike of 1.75% (from the 8.5% to 10.25% in the Prime rate). In practical terms, with average prices of houses for sale in Northcliff of R2,600,000, on a 20-year home loan, the monthly bond instalment has now risen by almost R3,000 per month over the past two years. This most recent rate increase alone resulted in a R862 rise in monthly payment!
The SARB indicated that the upper limit of its inflation range target (3-6%) will be in danger of being breached, primarily due to the drought-related food price inflation, as well as a very weak Rand. Forecasts indicate a 6.8% CPI (Consumer Price Index) inflation in 2016 and 7% in 2017. In case you’re wondering, the PPI (Producer Price Index) for the agriculture segment has crossed the 10% mark, which has started to reflect in our day-to-day food prices already!
Let’s not forget what’s happening to prices in education, electricity, water and municipal rates! Salary adjustments aren’t as quick, which means people’s disposable incomes are getting smaller with all these increasing household costs!
On the other hand (this wouldn’t be a proper economic report if I couldn’t at least say that once!), there’s the lowering of economic growth forecast for South Africa, where the GDP (Gross Domestic Product) figures are expected to only be 0.9% in 2016. Tougher economic times are ahead!
Analysts believe this 50 basis point interest rate to be a pre-emptive move (only a 25 basis point hike was expected), in anticipation of further worsening inflation figures. This interest rate hike will further slow down any consumer spending growth.
Another 50 basis point increase is expected at the next meeting in March, where the Prime rate figure is forecasted to be around 11% by year end.
There have been recent signs of a slowdown in national residential growth, and this latest upward adjustment in interest rates will only sustain such a trend.
From a property point of view, these interest rate levels don’t give much room for housing market speculation as cheap credit is drying up. As it stands, the current Prime rate sits comfortably above the average rate of 7% house price inflation, with the latter likely to slow down to the 5% level.
Buyers beware: as always, make sure to buy within your means, but in particularly this time around, DEFINITELY don’t overextend yourself as your monthly bond payments will continue to increase for the next 12 months!
About the author: The above update “50 Basis Point Interest Rate Hike” was written by Xavier De Buck, your top-producing Johannesburg real estate agent with Luxury Division of Chas Everitt International Group. Xavier has been nationally recognized and awarded for providing service excellence, exceptional property sales, whilst exhibiting the highest level of professionalism. With over 15 years combined experience as a real estate agent and real estate investor, if you’re thinking of buying or selling a home in Johannesburg, Xavier would love to share his property knowledge and expertise.
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