Commercial News

Rate hike first of many, it’s a bumpy ride ahead for property

The Reserve Bank’s decision to further increase the repo rate by 50 basis points  is likely to create a further dampening effect on housing demand as consumers are already exercising a more conservative and considered approach to both buying and selling.

The Bank raised the repo rate 50 basis points to 6.75%, a move that will see commercial banks raise their prime rates to 10.25% on Thursday, citing concerns over rising inflation and continued weakness in the rand.

Rising food prices have also been identified as an upside risk to the inflation outlook.

The weak rand has caused a deterioration in the inflation outlook and the Bank said it was concerned about this.

The Bank last raised rates 25 basis points in November last year on rising inflation and despite forecasts for modest economic growth.

This brings the cumulative rate hiking in the current cycle to 1.75 percentage points from a prime rate of 8.5% to 10.25% since the start of rate hiking in January 2014. It means that, on a 20 year home loan of R1 million, the monthly instalment has risen by R1,138 per month since January 2014, while the most recent 50 basis point rate hike alone adds another R331 to the monthly payment.

Andrew Golding, CE of the Pam Golding Property group said: “This increased caution is not surprising as disposable incomes remain under pressure, against a backdrop of rising inflation, further eroded by above-inflation increases in municipal rates and utility tariffs and as economic growth remains stunted.

 

“The decision to hike the repo rate at this first meeting of the year was widely forecast as the recent rand weakness and concerns about the deterioration in inflation expectations exerted pressure on the monetary policy committee to reinforce perceptions that it would take the necessary steps to contain inflation even though the economy is weak.”

“While many market commentators are suggesting that interest rates will rise by about 100-125bps during the course of this year (2016), even if these anticipated increases occur, interest rates will remain low by historical standards and, with inflation heading upward, the increase in real rates (taking inflation into account) will be more muted than the hikes in nominal interest rates suggest. One must bear in mind that at the height of the global economic crisis the prime rate in South Africa reached 15.5%.

Samuel Seeff, chairman of the Seeff group said by now, consumers should also be aware that this is the first of more hikes to follow. Seeff says that interest rates could rise by as much as a full one to three percent (1%-3%) this year, especially in the event of a credit downgrade to junk status.

“Although not good news for consumers, it does send a strong message to the international ratings agencies and investors that the Reserve Bank is serious about kerbing inflation and protecting the value of the rand.”

The market has had some time to prepare for the rate hike and Seeff says that consumers should know that they are in for a bumpy ride this year and will have to do some serious belt tightening.

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