Advice and Opinion

Benign inflation and interest rate environment positive for home ownership, says Dr Andrew Golding

While generally anticipated by commentators in the market, the decision by the Monetary Policy Committee meeting (29 January 2015) to hold the repo rate steady at 5.75 percent is most welcome – particularly at a time when as a nation we are coping with ongoing power cuts which impact negatively on businesses and individuals alike, says Dr Andrew Golding, chief executive of the Pam Golding Property group.

“The recent collapse in energy prices is a potential significant game-changer in 2015. Locally, the widely held premise going into the new-year was that growth would strengthen and that the SA Reserve Bank would raise interest rates to contain inflation and to normalise interest rates – especially as the US began raising interest rates. This would be necessary to protect the Rand.

“However, with the collapse in oil prices, inflation is much less of a threat globally and locally. In the US, the Fed may be able to delay much anticipated interest rate hikes from mid-year to later in 2015. In Japan and Europe, which are fighting off deflation, monetary policy is now like to be eased further. In South Africa, with inflation surprising on the downside, and with the Fed now likely to delay the first rate hike, the Reserve Bank is now likely to delay the next interest rate hike till later in the year or possibly even until 2016.”

Dr Golding says lower inflation and a delay in the timing of the next interest rate hikes is obviously good news for the local residential property market. In recent years, growth in house prices has outstripped growth in personal disposable income – resulting in a modest deterioration of housing affordability. Lower inflation and a subdued interest rate cycle will bolster household disposable income, helping to offset this deterioration to some extent.

“However, the benefits of the more benign inflation and interest rate environment may not be enough to positively impact the economic growth outlook. While the slump in oil prices benefits us by reducing the cost of imports, the simultaneous decline in other commodity prices is hurting our exports. And a substantial trade deficit makes the Rand vulnerable to further bouts of weakness.

“In addition to a tepid global growth environment – hence the weak commodity prices – South Africa faces additional local headwinds including load shedding, the prospect of further labour instability and infrastructure bottlenecks. As a result, growth is not expected to exceed 2.5 percent this year.

“Until such time as the economy is growing at a more robust growth rate, and is generating significant new employment opportunities, the local residential housing market is unlikely to enjoy more than at best low double digit growth in prices. What the property market needs is a return to the pre-recession growth rates of 5 percent to 6 percent accompanied by strong employment creation and healthy growth in salaries and wages.”

Concludes Dr Golding: “From a Pam Golding Properties perspective 2015 has kicked off with high market activity and a continuance of high demand and stock shortages in sought after nodes and areas – further boosted by the return of investors and growing interest from commuters. We are also seeing the increasing importance of first-time buyers seeking to gain a foothold in the market and acquire their own homes. Coupled with this, after a protracted slump, building activity has recovered and we are likely to start seeing more stock come onto the market – including units in new developments.”