Rate hike could hit the market hard

MANY South African economists, having frankly admitted that they did not expect the South African Reserve Bank’s Monetary Policy Committee to raise the interest rates (as they did recently by 0,5%), are now predicting that this hike could be followed by a further interest rate increase of 100 base points, i.e. two increases of 0,5%, within the first half of this year.

This, said Tony Clarke, the managing director of the Rawson Property Group is due to the falling rand, and could help it regain some of its former status and curb future inflation rates because it is now predicted that the cost price inflation will run at 6% in 2014 and as high 6,6% by the last quarter of 2015.

Clarke said a rise of 100 base points in so short a time will inevitably result in a slowing down of the general economy which is now predicted to have only a 2,8% growth in 2014 and the effect of the interest rate increase will be to ensure fewer people, particularly those from previously advantaged backgrounds, will become homeowners.

While it is true that middle and lower bracket homes will continue to be sought after and will maintain their values, the overall number of buyers of these homes will be lower than it could have been. This is a pity, said Clarke, as the number of such people have been growing at a very satisfactory rate.

Clarke added that those who have opposed the rise in interest rates have regularly pointed out that there are other ways in which inflation can be controlled.

“The most obvious and effective of these, in my view, would be to insist that those buying on credit of any kind (including home buyers) should have to put down a deposit and the size of these should be significantly increased.

“The time has come to try harder to foster a savings culture among South Africans of the kind that did exist in the 1940s and 1950s. 10 to 30% deposits on homes should now become mandatory.”

Increased interest rates, said Clarke will make renting more common in future (against the declared wishes of government) and will see the number of those blacklisted for non-payment of debts rising. This, in turn, means that they will no longer be eligible for home loans or indeed loans of any kind.

“Those of us involved full-time in the marketing of homes ask the reserve bank to hold back on further interest rate hikes because of the adverse effect these will have on the housing sector.

“Other means of fighting inflation are available and some of us think that these could be more effective than manipulating the interest rates.”