More good news for property owners as repo rate is expected to be cut this week

FNB says it expects South Africa’s Reserve Bank will cut its repo rate by 25 basis points to 6.5%, when its Monetary Policy Committee (MPC) meeting concludes on Wednesday, March 28. This would take the prime lending rate of banks to 10%.

The lender’s forecast is in line with those by a number of economists polled last week by Reuters. Fifteen of 22 economists said the bank would cut interest rates by 25 basis points, while two forecast a cut of 50 basis-point. The remaining five said there would be no change, Reuters reported.

From an inflationary pressures point of view, such an expected decision would appear completely justified, with the most recent CPI (Consumer Price Index) inflation rate for February at 4%, now in the lower half of the bank’s 3-6% target range, said John Loos, household and property sector strategist at FNB.

In addition, in the early stages of the year the rand has performed relatively strongly, thus curbing imported price inflationary pressures.

Loos said that the expected rate cut is expected to be a once-off in 2018, implying a minor direct impact in terms of lowering monthly repayments on household debt.

“We therefore expect that a loan rate cut will, along with already-improved economic growth recently, assist in driving mildly stronger residential demand, lifting average house price growth in 2018 to nearer to 5%, following a weak 3.8% average price growth in 2017.”

Loos said that over the medium term, economic changes to the country could have a positive impact on the household sector debt-to-disposable income ratio, which has been on a gradual downward trend since 2008.

FNB highlighted how the household sector’s interest payments on debt have changed over the long run, versus the trend in the interest received on deposits. It noted that in 1998, when average prime rate for the year was as high as 20.5%, the household sector’s interest income reached a multi-decade high of 7% of gross income, a level never seen since.

By comparison, in that same year its interest paid on debt reached 10% of gross income. Net Interest Paid (Interest Paid less Interest Received) by the household sector in 1998 was thus 3.0% of gross household income.

“We have a far lower average prime rate of 10.3% (in 2017), implying far lower lending as well as deposit rates,” said Loos. “But is the household sector as a whole better off for this than in 1998? Its interest paid on debt in 2017 was 6.7% of gross income, significantly lower than in 1998,” he said.

However, interest received on debt was a very low 2.6%. This translates into net interest paid by the household sector of 4.1% of gross income, higher than the 3% of 1998, the strategist said.

“Admittedly, lower interest rates can boost other investment income streams periodically, and households also receive dividend and other investment incomes besides interest income. But when assessing the direct impact of interest rates, on a net basis (interest income subtracted from interest paid) South Africa’s household sector pays more interest these days than it did in 1998,” Loos said.

“In short, an expected rate cut this week could mildly boost consumer and housing demand, and this would be seen as a short-term positive from that point of view. However, the bigger household sector picture is one of a still-weak savings rate, and still relatively high indebtedness,” Loos warned.

Read: The difference between the repo rate and prime lending rate explained

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More good news for property owners as repo rate is expected to be cut this week