More interest rate pain on the horizon
It’s not easy being a passenger on SA Inc at the moment. We’re at the mercy of rising inflation combined with the knock-on effect of the Reserve Bank’s inflation targeting policy. And the latest Statistics SA release of inflation data is not helping one bit.
CPIX (inflation with mortgage bond payments stripped out) came in at 10.9% in May this year against analyst expectations of 10.7%. The consensus view is that this move guarantees another interest rate hike when the Monetary Policy Committee of the central bank meets in August. Since June 2006 consumers have watched helplessly as Mboweni hiked the Repo rate no less than 10 times. And they’ve had to up their monthly bond repayments as the prime lending rate jumped from 10.5% to 15.5% over a 24-month period. But why are economists so surprised? And why were they only pencilling in 10.7% when many are on record that inflation will go as high as 12% in the third quarter of 2008 before the cycle turns?
Rate hikes are starting to bite
Whatever the answer to these questions, consumers are already paying 35% more to meet their bond instalments. Higher interest rates and debt levels are starting to bite. At the end of March 2008 South Africa’s debt ratio hit an all time high of 78.2%. But that’s not the real problem. What we’re worried about is the debt servicing ratio which currently stands at 11.8%. The debt servicing ratio is simply an indication of the aggregate South African debt repayment as a percentage of disposable income. And if that ratio gets to 12% we’re definitely in trouble. Because the last two times this ratio reached 12% the Reserve Bank took prime to ridiculous levels as high as 25%. This happened in 1986 after the infamous Rubicon Speech – and again in 1998 when the Asian Crisis dominated world headlines. With each successive interest rate hike this ratio creeps a little higher!
Meanwhile global inflation remains unchecked. The price for a barrel of oil remains above $130. And that’s not good news for South African motorists who are guaranteed another petrol price increase on the first Wednesday of July (next week). Analysts have pencilled in a hike of between 70c and 80c per litre.
Another major concern is that the latest inflation numbers don’t show the impact of NERSA’s recent price award to Eskom. Once this price increase filters to the end consumer we can expect to pay 30% more for electricity – with these costs filtering through the production and manufacturing sectors to add more inflationary pressure. It’s little wonder that local consumers are becoming increasingly desperate with motor vehicle and home repossessions on the up.
Advice for struggling homeowners
We recently spoke to FNB Home Loan Property Strategist, John Loos to find out what indebted homeowners could do in the wake of the current interest rate onslaught. Loos says there are a couple of options. And it needn’t be the traditional ‘interest rate fixing’ solution. Loos says this option “is not too attractive at the moment because the forward rate markets to which these fixed rates are linked are possibly still pricing in some further increases.” Most advisers agree that fixing interest rates in a rising interest rate environment is a bad idea. So the only motivation to fix rates is to satisfy yourself that you can afford any additional price shocks. We recently saw suggestions that you find out how much a fixed bond would cost you and then simply up your mortgage bond repayment to that level… You won’t get the upside risk protection; but at least you won’t fix your rate at too high a level either.
A second option is to change your loan to a longer period. FAnews Online has investigated this alternative and found that the actual difference to monthly bond repayments is not that significant. And you end up paying much more interest over the term of the bond.
“The other option for potential first time buyers is to rent for a while. Rental payments, generally speaking are still cheaper than 100% bond repayments,” says Loos. Although “rental versus repaying will get less attractive over time” your cash flow position will be much better in the short-term. Struggling consumers should also consider consolidating there debt by moving expensive debt into the mortgage bond. Of course you should steer clear of funding their day to day living expenses from the bond.
Editor’s thoughts:
If you scan through today’s newsletter it looks as if nothing has changed since the last interest rate hike. Food and fuel prices are higher, household debt is higher, and disposable income continues to shrink. Consumers are feeling the pain. Would you agree that today’s average household is facing tougher times than in 1998 due to higher levels of household debt? Add your comments below, or send them to [email protected]
