100 Points may not be enough!
Reserve Bank governor Tito Mboweni rewarded struggling consumers with another 100 basis point interest rate cut on 30 April 2009, bringing the prime interest rate (the base rate for most mortgage loans and hire purchase agreements) to 12%, significantly lower than the 2008 high of 15.5%. Minutes after the announcement a number of online news feeds ran stories claiming this cut would “make little difference to indebted South Africans.” The managing director of DebtBusters, Luke Hirst, told Sapa that while the interest rate cut was a move in the right direction the majority of his clients would not see any tangible benefit. Does this claim have merit?
When the prime interest rate was 15.5% the repayment on a R750 000 mortgage bond was R10 155 per month. After last Thursday’s cut the repayment would be R8 258, a decrease of some R1 897. Surely this huge monthly saving will provide some relief. But if you consider a bondholder who has missed three monthly payments the outlook remains rather gloomy. It will take this individual approximately fifteen months to catch up on the R30 000 in overdue instalments without even considering late payment penalties and additional interest charges.
Quick house price recovery a pipe dream
This is bad news for residential property. Under such conditions house prices will remain under pressure with new building projects put on ice indefinitely. Credit Suisse Securities analyst Marc Ter Mors told Fin24.com that “interest rate cuts will be a help for building activity in the private sector; but the lead times are long.” This view is confirmed in the most recent Absa Property Index. The bank says “despite the expectation of further interest rate cuts the household sector may continue to experience some financial strain this year, especially in view of an expected poorly performing economy.”
House prices fell 0.4% year-on-year to March 2009, following a 0.2% year-on-year fall in the previous month. Absa said house prices were falling sharply in higher price classes, “an indication of the upper end of the market being under much pressure with more buyers opting for smaller and more affordable housing.” Absa believes the residential property market will bottom in the second half of this year with a gradual recovery expected in the second half. The bank forecasts a nominal decline in house prices of between three and four percent in 2009. The outlook for residential property is linked to affordability and the ability of the average consumer to service debt rather than interest rates alone.
How low will interest rates go?
Economists expect another 150 basis point cut in interest rates to June of this year as long as inflation plays ball. Unfortunately the latest statistics suggest inflation might not fall as fast as initially predicted. Statistics SA reported a marginal decline in March 2009 CPI, down from February’s 8.6% to 8.5%. The March number was slightly higher than expected due to increases in regulated prices (such as rates, medical aid contributions, electricity tariffs and fuel prices).
Food prices remain a major concern too. Trade union Solidarity says the price of a basket of goods at the country’s main food retailers is 5.5% higher over the last four months. These increases occurred despite a downward trend in food prices and retailers’ claims that lower producer prices are passed on to the end consumer. Solidarity has become increasingly vocal on food price increases as thousands of South Africans face the prospect of retrenchment. They single out washing powder, coffee and full-cream milk as the major culprits. Since January 2009 “the price of Omo increased by an average of R10.20 (21.1%), while Ricoffy and Clover milk increased by an average of R6.66 (14.5%) and R3.36 (19.3%) respectively,” said union spokesperson Jaco Kleynhans in a statement.
While further interest rate cuts will be welcomed, we’re not sure this relief will be enough to bolster South Africa’s ailing housing and motor sectors. It’s going to take more than a few hundred basis points to rekindle these industries.
Editor’s thoughts:
The Reserve Bank’s effort to put more money in our pockets through interest rate cuts is quickly undone by increases in other areas. Although part of the inflation measure, municipal rates, petrol, food, school fees, insurance, medical aid and electricity seem to outstrip the official CPI number year after year! Will the latest interest rate cut make a major difference to your monthly cash flow? Add your comments below, or send them to [email protected]
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