INTEREST RATES [Part 2]
In Part 1 we spoke about interest rates which are so topical at this point in time, across the globe.
Japan became the first major economy to adopt a Zero, [and even negative in January 2016], interest rate policy in 1999 as the Bank of Japan sought to stop a slide into deflation by making money available at virtually no cost. The rub of this is that any Japanese bank that parks money with the Bank of Japan needs to pay them interest to do so.
And so, began my exploration of some interest-ing facts:
The following countries have the highest Savings rates in the world:
| Top 10 Countries with the highest Savings Interest Rates | ||
| Ranking | Country | Savings Interest Rate |
| 1 | Kyrgyz Republic | 9.59% |
| 2 | Gambia | 8.00% |
| 3 | Mexico | 6.15% |
| 4 | Brazil | 5.04% |
| 5 | South Africa | 4.88% |
| 6 | Uganda | 3.88% |
| 7 | Bangladesh | 3.80% |
| 8 | Zambia | 3.13% |
| 9 | Kingdom of Eswatini | 3.08% |
| 10 | Seychelles | 3.03% |
| Source: International Monetary Fund | ||
I suppose you knew that the Kyrgyz Republic is a landlocked country in Central Asia with China to its East ☺
What’s interesting is that South Africa has the fifth-highest Savings rate in the world. I’m a little out of date, but no wonder, together with the exchange rate, the “swallows” from Europe and Britain love coming here for summers. To be honest, in our town we can’t wait to see their rosy-cheeked faces again; our first influx of tourists for half a year.
Then, there are those countries with the highest cost of Borrowing rates in the world:
Fascinating hey? The bottom 3 have all bought into negative interest rates as a policy. Those many at zero are probably watching them in anticipation. The highest 3 are basket cases brought on by disgusting government [being the most diplomatic term I can use to describe the bankruptcy of their policies]. And South Africa finds itself somewhere in the middle, seemingly well-managed in the crisis to have reached this point. And now that you know where it is, Kyrgzstan has a borrowing rate of 5% – another reason why you should not be living there – just joking, all my Kyrgzstanese friends ☺
Our housing market has exploded post lockdown Level 2. We know that there was pent-up demand but no doubt the sharp reduction in interest rates has contributed. What really impressed me in the latest ooba statistics was the total approval rate they achieved. Off a high during covid in July 2020 of 80.29%, for the past year, they have achieved an average per month of 80.29%. absolutely brilliant and a salute to the banks as well!
Cost of ownership in homes is basically bond repayments, service costs and levies, where applicable. However, in the latest Property Insights from John Loos, FNB Property Sector Strategist, entitled, Don’t expect major “fireworks” in the Commercial Property Sector on the back of low interest rates, he tells us [by way of extract]:
This property segment [Commercial property] is less sensitive to interest rate moves than the Residential Market, and negative economic growth forces are currently the dominant influence on it.
SARB’s latest repo rate unchanged decision doesn’t alter the fact that the Bank has given very significant stimulus… [and] this appears to have breathed significant life into the residential demand side of the property market. But it appears to be a tale of 2 markets, with the Commercial property market seemingly far more subdued and not taking the low-interest rate “bait”. And more focused on the economy than on interest rates.
But there are some good reasons to expect the residential market to be noticeably stronger currently, and likely in the remaining months of 2020 at least. We say this for the following main reasons:
1. The Commercial Property market typically takes longer to respond to interest rate cuts that Residential
Firstly, following major interest rate cutting cycles in the past, the resultant growth surge in new residential mortgage lending has often been more rapid than that of new commercial mortgage lending. This points to households on average being more sensitive to interest rate moves, and typically making property buying decisions in a shorter time frame than their commercial property counterparts.
This begs the question as to why this should be?
2. Households possibly make quicker investment decisions than businesses, while also perhaps possessing a stronger “ownership culture”
Typically, I believe that on average the household decision-making process regarding whether to buy a home or not is significantly quicker than that of the average business. In the case of the latter, there are arguably more considerations regarding cash flows and alternative uses for those, and often more people to consult with. I am also of the belief that there is a stronger culture of property ownership prevalent in the Residential Market. Households often see homeownership as a creator of wealth, repaying a bond on something one owns as a better alternative to paying rent to a landlord.
3. The recent COVID-19 lockdown was a major production side economic shock, arguably hitting businesses far harder than households to date. The weak economy thus appears far more as an influence for the Commercial Property Sector than low-interest rates.
In the current economic environment, it may indeed make sense for many business owners not to rush into buying their property at the same rate that a portion of households appears to be going for the home buying option. The TPN tenant data suggests, therefore, that the business tenants have to date taken a far greater financial knock than residential tenants (largely households). In the 2nd quarter of 2020, as lockdown got underway, the percentage of residential tenants in good standing with their landlords dropped from 81.52% in the 1st quarter to 73.5%. By comparison, the percentage of commercial tenants in good standing dropped far more severely, from 77.85% to 50.36% over the same 2 quarters.
The lockdown was a production side shock, and to date appears to have done far more damage to businesses than to households. This added to the likelihood that we would not see any significant commercial property demand response to interest rate cuts this year, and indeed this appears to have turned out to be the case so far.
4. But 2020 rate cutting has made a difference to the commercial property market nevertheless… providing crucial relief for tenants and owners, possibly containing the growth in supply of property on the market.
However, we do see aggressive interest rate cuts as having an important function in the Commercial Property Market, but perhaps more on the supply side of the market.
Rather than bolstering property demand, the key role the rate cuts earlier this year has possibly been in providing relief to current property owners. However, the 2020 rate cuts probably haven’t been sufficient to prevent a significant oversupply of property in this economic environment, but we do believe the supply glut may have been headed for far higher levels had there hypothetically been no rate cuts.
Conclusion
In short, the 300 basis points’ worth of interest rate cuts to date in 2020 has likely provided significant support for the Commercial Property Market through providing relief to businesses. However, in this severe recession, the stimulus impact has largely gone unnoticed, overshadowed by the negative recession economic impact.
The Residential Property Market, by comparison, appears to have responded quite noticeably to interest rate cuts. To an extent, this is normal, the residential market having responded more rapidly to interest rate stimulus in prior major rate-cutting cycles too. But… the Residential Market appears to have responded far more significantly to this year’s interest rate cutting than the Commercial Property Market.
These Insights are a valuable case study for our interest rate discussion. Fundamentally, for all the power of interest rate manipulation, it cannot make everything happen for everybody. For some, it drives us to buy but for others, it serves only as a survival tool for their business. John is talking to businesses buying their properties as a rent saving and wealth creation tool, but another personal case study really drives home the point. A property investment portfolio reveals the true tragedy of Commercial property in 2020.
The decline from the initial investment cost to this month is 61% and the yield on the investment against its initial cost has declined to 4.7%. No doubt the fund manager has included the entire Property Index in their tracker fund and so this impoverished result reflects the state of Commercial property in South Africa. No wonder Growthpoint has revalued all its properties by 20%. In this sector, a drop in interest rates on the bonds would be meaningful, but as I walk past a vacant Edgars store in my local shopping mall, it really says it all. One of two anchor tenants gone bust probably owing millions to the landlord. In short, it will take more than a 3% reduction in cost of borrowing to even come close to rescuing the Commercial property valuations.
I’d like to finish on a positive note with something that really struck me when I read it. It is not directly related to interest rates but is of obvious importance for the rescuing of our towns’, in general. We know that small business has been decimated by covid’s lockdown and I believe some 28000 of them have gone out of business. This article in Businesstech by a Staff writer, Catherine Wijnberg, on 5 September 2020 entitled, The basic economics of spending R10 in South Africa – and the importance of supporting local, is a real-good, feel-good read:
There are those who have lots, and those who have little, yet if people understood the power of a single Rand to change the future of the country, everyone might spend it very differently. In 2015, a paper on the negative impact of shopping malls on local economies used research from India, USA and South Africa to explain how the arrival of a glamorous mall sucks the money out of the local community and pulls it away, into the coffers of big business.
The counterargument in favour of malls is that small, rural and township dwellers deserve first world shopping, which provides local jobs and convenience, entertainment, and better pricing than traditional high street shops. Most township residents would certainly vote for glorious first-world shopping and low prices, at least in the first year.
By year three, however, they might notice, for example in the small town of Grabouw or Knysna perhaps, how the main street is deserted. Small businesses that had thrived there for generations are now reduced to mere shells of their former self and replaced by those selling counterfeit, imported T-shirts or cheap bling.
The money circulating locally has dwindled, small businesses have closed, many jobs have disappeared, and local wealth departed along with them. By year four or five, the shopping malls also suffer as local buying power is depressed along with the lower employment rate, resulting in an overall downturn in spending.
For those who need more convincing, it is important to look at the maths of it. In basic terms it works like this – in the days before the arrival of malls and major chain stores, Mary would spend R10 at the baker; who (assuming a 10% profit retention); would spend R9 at the butcher; who would spend R8 at the tailor; who would spend R7 at the school; who would spend R6 at the stationery store; who would spend R5 at the farmer’s market and so on. A simple illustration of how one R10 note can create wealth ten times over.
Local wealth
In today’s reality (especially in poor communities such as the Eastern Cape where up to 60% of the population live off social grants and there is very little local economic activity), Mary gets R10. She spends R7 at the local Boxer store where R2 of her money goes to local shop wages, R5 goes to national suppliers elsewhere in the country and R1 goes to shareholders at the JSE.
She also spends R3 to buy data at MTN, so all that money goes to MTN headquartered in Gauteng. None of her R10 circulates in the local economy so no one other than Mary benefits from it. Money in equals money out and there is zero local wealth creation. Mary’s R10 didn’t stay in the local community for even one day.
This is not just a South African phenomenon. This indicates that this is more than a mere economics problem, but a social and cultural one – why do some communities care for each other, by shopping local and others not? Is it because South Africans simply haven’t understood the power of that rand in their hand, or is something else at play?
Why supporting local matters
It is time to ask the question of rich and poor alike: “If I knew this R10 could change the lives of ten other families in my community simply by spending it locally in a small spaza shop, a corner café or a farmer’s market, then why am I not doing that?”
By supporting small independent businesses in our community, encouraging citizens to trade with other local businesses using local collaboration platforms, local discount cards, and pleasurable local entertainment will build stronger, supportive human communities, generate local jobs, and ensure that our money circulates so that ten families can benefit from every R10 that enters the system.
Shopping malls can also develop more viable long-term strategies such as those showcased by the V&A Waterfront in Cape Town, who have improved their lasting appeal and built a more sustainable and healthy surrounding economy by actively encouraging a diverse mixture of smaller businesses. [Clicks have also had to re-think their shelf space for smaller businesses [Writer].
Recovery and regrowth of South Africa’s economy is our responsibility; now that you know the power of your money, where are you going to spend your next rand?
I really enjoyed writing these two blogs. Some of the information is just interesting. Some are new learning. But this last article amazed me in its simple logic and powerful influence. I happen to have a 5-star country market just up my street and love to frequent it and I’ve just returned from a local butcher who makes the best boerewors in town according to… wait for it… Facebook!
But what about HLJ? We know the interest rate and its impact, we have demonstrated a keen interest in your business for 17 years and value your impact, and we have a national footprint of highly skilled consultants for impact. We value your business and want your business; we have just had another record month because of your business. And we find ourselves humbled and grateful to have survived a mean pandemic with you.
“Interest” has just taken on a whole new meaning and we Thank You.