Whatshot
Property Talk
Property Talk
Date: 2019-08-02
Low ebb in the property market cycle
The South African Reserve Bank is a great resource for key economic data, The current quick overview indicates CPI inflation at 4,5% and PPI inflation at 6,4% (Producer Price Inflation or the price escalation of goods leaving the factory).
The Rand: US Dollar exchange rate is 14,28. The Rand:£ exchange rate is 17,61 and the Rand: Euro at 15,87. These rates you would be watching carefully if you were a trader - either importing or exporting goods or if you were looking to import money into South Africa to take advantage of the low ebb in the property market cycle.
The July meeting of the Monetary Policy Committee resulted in a 0,25% decrease in the repo rate to 6,5% and in turn the reduction of prime overdraft rates charged by the leading banks of South Africa to 10%. A 0,25% reduction in your typical mortgage rate is not going to make much difference at the individual level as a R1m mortgage bond over 20 years at a rate of 10,25% will cost you R9,816 p.m. versus R9,650 p.m. at a reduced interest rate to 10%. This is a R166 difference per month or R1,992 per annum.
Few of us will consider a R166 p.m, saving to be significant enough to determine our decision making around purchasing a property or not. At the microeconomic level, the impact is therefore not evident. However, on a macro-economic level, the bigger picture becomes more interesting. According to ABSA the total outstanding mortgage balances of the private sector (including businesses) is currently R1,439.3 billion.
Of this R974.9 billion is the household mortgage balances in South Africa. If we consider only the mortgage debt rather than the R3,772.3 billion of total South African private sector credit balances for our exercise, then we see that a 0,25% reduction in the mortgage rate will save the private sector R3,6 billion per annum and save South African households with mortgages R2,44 billion per annum. This is not a small amount and can find its way through our economy in increased consumption expenditure.
Having enjoyed a decade of relatively low (by historical standards) and flat interest rates our expectations have been shaped to expect little change in the interest rate. In the same way, the Reserve Bank's ability to keep inflation within the targeted 3-6% band for an extended period has ensured our expectations of inflation are now relatively predictable within the 4,5 - 5,5% range.
These are solid fundamentals and the only ingredients lacking now to get us on a growth trajectory is business and consumer confidence fueled by some good news and steady and positive GDP growth rate.
Property investment decisions are typically made with a long-term view. To act on the opportunity people require confidence. While there is no evidence of a lack of money in the economy, this money is finding itself into non-productive channels as a hedge against uncertainty.
This is a very rational approach during times of uncertainty, but not a way to make money. The smart money is currently taking advantage of the low ebb in positive sentiment and actively seeking out the bargains that are presenting themselves as they fully understand that you make your money when you buy, not when you sell.