What does the rate hike mean?
The 50 basis point increase in the interest rate announced by the Reserve Bank last week (the second in recent months) should not, on its own, make a huge dent in household affordability. With prime now at 11,5%, up from 10,5% at the beginning of June the average monthly payment on a twenty-year, R200 000 mortgage (the top end of the Financial Sector Charter target) is about R136,00 (just under US$20 at current exchange rates). Surely most households can afford this kind of pressure on their monthly incomes?
Not.
The problem is this: while the Reserve Bank rate impacts on mortgages, it also impacts on the cost of other finance – so while households have to pay another R136, or so, on their homeloan, they have to pay more for their other credit, as well as for food, clothing, transport and other essential items. At the same time, the petrol price has also increased to an all time high (R7.04 per litre), which puts further pressure on the cost of essential items. And, in the context of enhanced financial access (something we keep on saying we want, and a clear policy of government and supported wholeheartedly by the financial sector) a lot of families have accessed a lot of credit.
The statement of the Monetary Policy Committee regarding the interest rate hike in June highlights this increased access to credit explicitly as a reason for the first rate increase:
These developments continue to be reflected in the growth of credit extension. Twelve-month growth in bank loans and advances extended to the private sector measured 23,1 per cent in April compared to 24,3 per cent in March, while asset-backed credit extended to the private sector continued to grow strongly at a year-on-year rate of 27,2 per cent in April, reflecting strong growth in mortgage advances. This has resulted in a further increase in consumer indebtedness. In the first quarter of 2006, the ratio of household debt to GDP had risen to approximately 68 per cent, compared to 65½ per cent the previous quarter. The cost of servicing the debt has remained fairly stable at around 7 per cent.
Another motivation behind the rate hike was the surprising increase in producer inflation, which rose to 7,5% year on year in June (up from 5.9% in May), its fastest pace in more than three years, and far above expectations. Largely because of the weaker
That is, except housing, which as a result of all of this, is finally cooling off. Standard Bank, in their recently released Residential Property Gauge, offers an analysis that vaguely sounds like good news for first time homebuyers:
“The deterioration in households’ financial situations on the back of record-high indebtedness, an all time low savings rate, record high petrol prices and rising interest rates will constrain their ability to pay increasingly higher house prices. At the same time, investors’ appetite for buy-to-let properties has declined following lower yields. House price growth will therefore be constrained in the short term.”
So, while household affordability for credit is diminished, the pace at which house prices have been running away from household affordability is decreasing.
This would be fine in the context of a normal market – eventually the demand and supply capacity would even out and house prices would reflect the affordability of homeseekers – a buyers’ market so to speak. But in the current South African context, the Financial Sector Charter has imposed a deadline of December 2008 by which time the banks have to have extended R42 billion worth of housing finance to moderate income households – those earning R1500 – R7500 (now R8200 given CPIX increases). These are exactly the households that are getting all sorts of credit from all sorts of other sources: furniture stores, credit cards, store cards, and so on. And in the absence of a working secondary (resale) property market at the bottom end, how will households cope if they can’t service their debt?
And how will the banks’ anxieties about meeting their targets (already banks are talking about taking on the delivery of housing themselves) interact with the decreasing capacity of their FSC target market to accept the credit they’re offering?
Is anyone nervous?
