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INTEREST RATE REVIEWS AND THEIR IMPACT ON OUR HOMES

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A very interesting week last week. Two interest rate reviews, one up and the other, sideways.

But before we think about the effect of this on our home and homeloan businesses, here’s a quote from Ayn Rand to encourage you:

“In the name of the best within you, do not sacrifice this world to those who are its worst. In the name of the values that keep you alive, do not let your vision of man be distorted by the ugly, the cowardly, the mindless in those who have never achieved his title. Do not lose your knowledge that man’s proper estate is an upright posture, an intransigent mind and a step that travels unlimited roads. Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won, it exists, it is real, it is possible, it’s yours.”
– Ayn Rand

On 28 January, the Monetary Policy Committee of The South African Reserve Bank [SARB] announced an increase of 0.50% in the Repo rate, which will result in the Banks’ Prime lending rate increasing to 10.25% with effect from 29 January 2016. This was the first interest rate review mentioned above.

A few comments:

  • I heard a leading economist interviewed this week and he would not be drawn into quantum of the interest rate hike in 2016, whether 1 or 2%, but he did make the point that it would be well considered and managed.

  • I did stick my neck out in the last blog and say 2 % this year as I feel the Rand and inflation will have the final say on how much.
  • As regards the Rand, it was wonderful to see it pull back; from the mid-R16 range, to about R16.26 to close around R16.18 on Friday. So the market was factoring in a significant rate hike on Thursday and got it.
  • We are between a rock and a hard place with the interest rate. From a growth perspective, we cannot afford rising rates. Both indebted business [Employment] and consumers [Affordability] will find the going tough. Harming either constituency will harm the country. Sadly, though, with the Rand slide by about R3 from R14 to R16 (and as high as R17) to the US$, Inflation will rise. The 6 tons of Maize being imported does nothing to improve the situation. Last year, Inflation averaged 4.6% and in 2016, is expected to average 6.8%. The SARB target range is 3-6%.
  • Remember, absolute versus relative maths. “Only 2.2%” does not seem like much Inflation, but it is 48% [2.2/4.6*100] more Inflation than in 2015. In turn, the 0.5% rise in rates is not “just half a percent”, but forms part of a 1.75% rate rise off the lowest base, 8.5% on 20 July 2012,  since 15 November 1973 [See the Chart attached] when it was 8%. Therefore in relative terms, the cost of interest has risen since July 2012 by 21% in three and a half years. That’s a lot more interest being paid.
  • The process is being well managed and is simply unavoidable. The SARB has done the responsible thing and protected the Rand exchange rate which has been in a mess even before El Nene given Emerging Markets battling a very strong US$. By the way, a stable exchange rate to all major currencies is one of the core functions that a Reserve/Central Bank executes. In addition, if our Finance Minister has any chance of staving off a Non-investment grade rating by the Rating Agencies, he is going to need a strong, independent SARB doing what is right for Inflation. Also, by the way, his fight with SARS is also very important as they need to collect the revenues in order to keep Government stable. In the absence of efficiency in SARS, taxes will go up much more in February.

So, to sum it up, the rate rise was good for SA Inc, Inflation and the Rand/$ exchange but bad for Debt users. Overall, probably unavoidable after December 2015. I sincerely hope my 2% rise (1.5% remaining) proves very wrong for us. Watch the Rand, Inflation, the Drought and Oil.

With less detail, the US FED decision to retain the US interest rate where it is was is also them saying they do not want to dampen the US economy. That is really good news as:

  • The stock markets accepted that as meaning the US economy remains strong enough for about 2% growth in GDP. Hence the global markets rallied somewhat.
  • That fact makes up for China and provides them some headroom to work through their issues.

So, overall, a good week for rates in a fragile environment.

So what about us, you ask?

FNB put the house price rise for 2015 at an average of approximately 6.4%. that would give a real price rise of almost 2% after Inflation. ABSA, in their January 2016 synopsis expects an approximate 5% rise in 2016 and this will result, as we can expect from the rise in Inflation, in approximately -1.8% decline in real house prices this year. They quote a number of factors but the one that would concern me the most is weak Consumer Confidence. But please remember, the reversal in the real house price growth rate is because of the large increase in inflation and not necessarily because less homes are being sold.

That means that house prices will continue to rise so the question then is:

–        What volume will be sold?

–        How much of that will I, as the estate agent/principal, sell?

My sense is that less houses will be sold this year and the affordable homes will continue to dominate sales. My reasoning is simply that affordability will be affected by higher interest rates and Inflation will eat away little by little at our disposable income. I expect some tax increases but I’m not sure if the Finance Minister will target the rich or make them across the board. I don’t think VAT will rise as it is just too sensitive – we’ll see.

The last question remains yours to answer. When all the pundits have had their say and I have written mine, you must decide if you are going to list less, show less and sell less. That answer remains with you and your energy and enthusiasm. Believe all you read and internalise it, and anyone could predict your outcome – sales will slide.

Read it, think it through and find the way around obstacles with optimism and determination, not letting  the hero in your soul perish, and you will enjoy success. Check your road and the nature of your battle. The world you desire can be won.

Homeloan Junction has made that decision and will be there to support you in yours.

Yours in Property.

Jack

THE STATE OF THE MARKET AND THE GLOBAL ECONOMY: WILL YOU RISE OR FALL?

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My apologies for this blog so late in January 2016. To be honest, I have been thrown by the state of the market and the global economy. Little positive has come out of all the news and the negativity has taken on Grim Reaper proportions. Every article seems to be focussed on the negative and bad news aplenty has been there to write about. El Nino and El Nene, the collapse of the oil price, the pressure test of the Oil industry and oil-producing countries, threats of social unrest as the drought intensifies and the oil-based economies suffer, Donald Trump and Hiliary, and the Rand on its way to R20/$. Each and all contributed to a flood of depressing information.

But that said, some sanguine voices have arisen and a semblance of encouraging, well-backed information has begun to emerge. So let’s have a look at a few of the pillars that underpin some good news and find our way into February and beyond. Cliché or not, Henry Ford sounds clear: If you think you can or you think you can’t, you’re right.

Low Oil Prices: I often think Thank Goodness for the lowest oil prices in a decade. For the consumer of oil, that has been a saving grace. Imagine having to buy Oil at R16.50 per Dollar? I guess the price at the pump would be R14+. Macroeconomically, the oil price also contributes positively to Inflation which, as we see later, must be on the rise.

The problem that is being referred to by many writers, however, is the impact of low oil prices on the oil-producing countries. Of the BRICS countries with whom we have close co-operation, Russia and Brazil both have significant economies built on oil. Then there are the Asian countries like Saudi Arabia and closer to home, Nigeria and Angola. If a country endures dramatic, sustained drops in the price of its richest export, what happens to its people? Of course, the worst is feared especially at levels below $30. Today (25 January) it is up to $32.18 from last week’s sub-$30 prices. That could prove to be good news even for own Sasol.

USA interest rates rise: The USA interest rate rise signals the FED’s satisfaction with the US economy. 2% GDP growth is not fantastic but coupled with a 5% Unemployment rate, is cause for a small move. This is the first rate rise in 8 years and sent the currency markets into a flurry. Thanks to our Reserve Bank, we had already begun the process of raising interest rates. This did help cushion the decline of the Rand. The FED has signalled more increases but I suspect these will be 6 monthly and of the order of 0.1 to 0.15% – right now nobody wants to allow the US economy to stumble.

Inflation: The world has experienced extremely low inflation as the interest rates and China have functioned in tandem. Inexpensive production out of China to global markets and very low interest rates have kept Inflation at lows for record periods. But, post the sub-Prime crisis, the printing of money became commonplace and it was just a matter of time before inflationary pressures would reappear. Rather than focus on the rest of the world, South Africa will be hard hit by this issue. A weak Rand, set to weaken much further, and the drought with its Maize imports will hit Inflation hard. A particular make of 4X4 has risen from R713000 in 2012, to R890000 in 2015 to R980000 in 2016. That’s 13.5% per annum or twice the upper range of the SARB’s target. Far more relevant is the current requirement of Maize to be imported at a cost of R20bn; once we’ve paid for it, our producers need to make a profit on sale. The Poor amongst us will bear the brunt of the drought.

My sense is that our Inflation will rise significantly this and next year and exceed the target range of 3-6% even this year.

Interest Rates: In all of this, our interest rate was generally projected to rise by 1.5% from about mid-2015 to end-2016. My sense is that we could see a rise of another 2% this year in order to protect the Rand/$ exchange rate and in an attempt to curtail Inflation. This will result in a  corresponding rise in mortgage rates.

What is really positive is that Pravin Gordhan said last week at a Press conference that he would do everything in his power to prevent the Rating Agencies re-rating South Africa to non-investment grade (Junk bond) status. By the way, Brazil and Russia are already there and Saudi Arabia is, like us, on the brink so we are not the only ones in this pickle. The question will be if he has the resources in the budget to do so and a tax hike seems to be on the cards as part of his attempt. Sadly, a downwards rating will weaken the Rand and increase Inflation and interest rates.

China at 6+%: The way many people have been writing, you would think China is in recession. This is not true and that country is currently growing at about 6.8% per annum. Their stock market seems to warn of an underlying crisis but it has 50 million [you read right: Fifty million] personal investors and their layman’s view could be “run to avoid the stampede”. Assuming this is not the problem, the Chinese stock exchange should settle at a new, albeit, lower equilibrium, and stop spooking the other world markets.

Goldman Sachs report: Prime Minister Modi in India is credited with the revival in that country. India is growing at 7.2%  and has introduced business friendly policies that have brought about a marked improvement in growth and employment. China’s 6.8% is then ahead of Indonesia at 4.5% and Turkey at 3%. Overall, Goldman’s report puts 2016 global growth at 3.5% (2015: 3,2%), confirming the World bank view of 2016 growth between 3 and 4%.

It would seem therefore that many economies are progressing well even though stock markets worldwide have found themselves in a fear-and-greed state. The consequence of this is volatility and we will need to get used to it for the next quarter or two assuming the oil price retains some stability above $30 and China settles down enough for a recovery in commodity prices. Hold thumbs!

So, as we read about this mixed up world economy, there lies a decision for each of us – Rise or Fall. I understand that it’s “talking psychology” again but I think Henry Ford had a point. Why is it that some businesses will do well despite the headwind and others will crumple into a heap? Surely attitude, determination, a go-through spirit and sound leadership has a massive role to play. Look how India – complex beyond compare – can be turned around by a man and his vision translated into action by his government. Compare that to what we endure despite our blessed resources, sound financial system, great infrastructure and people; really, there is no excuse. On the other hand, we are not immune nor an exception – Australia is suffering the commodity price slump, Europe is struggling to come out of its economic woes, the whole of Southern Africa is in the grip of drought, and the USA and the UK are two of the most indebted countries on earth. But, instead of bemoaning our dear country, stand up and be the difference you want to and need to see.

Homeloan Junction will commit to putting its best foot forward. In doing so, thank you, in anticipation, for the support we will receive from you in 2016.

Yours in Property,

Jack