How much your bond has increased thanks to rate hikes in South Africa
New data published by FNB shows how much more consumers in South Africa are paying on their monthly home instalments, following a gradual rise in interest rates over the past several years.
The South African Reserve Bank on Thursday decided to keep its policy Repo Rate unchanged at 7%, which will keep banks’ Prime Lending Rates at 10.5%. This was in line with the general expectation.
FNB said that the decision is appropriate from an inflation point of view. CPI inflation for June was indeed slightly above the 6.3% SARB upper target limit of its 3-6% target range, with a drought-driven food price inflation spike being the biggest single driver of CPI inflation.
“However, besides food price inflation being an area of inflation over which the SARB has no influence through monetary policy, this spike can be expected to pass through as the severe drought conditions lessen and as high base effects begin to impact on food’s year-on-year inflation rate,” said property sector strategist at FNB, John Loos.
FNB pointed out that the rand’s behaviour has improved slightly in recent weeks, ‘which improves the inflation outlook by lowering imported price inflation pressures’.
“Furthermore, the current economic weakness implies little in the way of home grown “demand-side” inflationary pressures, further justifying an unchanged rate decision,” said Loos.
From a consumer point of view, FNB said there was little need to hike interest rates. It has been important to contain the pace of household sector credit growth in order to further lower the household debt-to-disposable income ratio from its first quarter level of 76.6% as at the first quarter of 2016.
“A lower household sector debt-to-disposable income ratio is crucial in lowering the level of household vulnerability to economic and interest rate pressures in the longer run,” Loos said.
According to FNB, the average prevailing lending rates, marginally above Prime Rate of 10.5%, are significantly higher than single-digit average house price growth in most parts of South Africa, keeping the market largely away from “over-exuberance and large scale speculation”.
FNB said that in 2016, it saw a more noticeable uptick in mortgage arrears, as per the NCR (National Credit Regulator) data. “A pause in rate hiking in May and July may just slow any further potential rate of increase,” Loos said.
The extent of interest rate hiking in SA
On a R1 million bond at Prime Rate, the rand value of the monthly instalment has increased by R1,306 from the beginning of 2014 – when Prime Rate was 8.5% – to the present day – Prime Rate 10.5%.
For those buying an average priced home as at June 2016 (according to the FNB House Price Index estimate of average price), the year-on-year rate of increase in bond instalment compared to those buying in June a year ago was 14.4%, taking into account both the bond instalment increase as well as the average house price inflation.
From the end of 2013, just before the start of interest rate hiking, the cumulative increase in the bond instalment on the average priced home has increased by 42.1% to June 2016.
“Home buying has thus become noticeably more costly over the past two and a half years, said FNB.
Rise in monthly bond value (click to enlarge)
Outlook
FNB said it doesn’t believe that the SARB is quite finished with interest rate hikes yet.
“We are not expecting the latest CPI number to influence the MPC to raise interest rates this week. However, the above mentioned impact of lower commodity price base effects exerting mild upward pressure on CPI inflation later in the year leads us to expect one further 25 basis point Repo Rate hike late in 2016,” said Loos.
Moving into 2017 we expect a lengthy sideways movement in interest rates as CPI inflation is forecast to slow to an average of 5.9% in 2017, back into the 3-6% target range after a forecast 6.6% average for 2016
Loos warned that consumers should not to “drop their guard” based on widespread speculation from market commentators that interest rates may have peaked. “The reality is that the future remains an uncertain place, and many inflation and interest rate forecasts depend on the always hazardous assumption of a reasonably well-behaved Rand. This, we know, can change at any time in these volatile times.”
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