Speculation is now rife (at least in some quarters of the business world) that the South African Reserve Bank will before the end of this year finally find itself ‘forced’ to raise interest rates in response to rises put through by the US Federal Reserve authorities.
As always, however, there have been ‘concerned and interested parties’ throughout South Africa who have continued to lobby for either no increase – or a very limited increase in the rates.
Bill Rawson, Chairman of the Rawson Property Group, is one of those who believes that the disadvantages of any interest rate hike would far outweigh the benefits.
“Over the last 18 to 24 months,” said Rawson, “we have seen the South African consumer trying to come to terms with a new set of challenges. These include a high oil price (the low price period having proved temporary), exceptionally big increases in electricity costs (with more to come), a rapid rise in the general cost of living (especially food and transport costs) and far tighter credit controls. These and other factors have led to the South African consumer finding it very difficult to save and often, regrettably, to adopting a dangerous ‘live now’ attitude to his finances. One result of this is that South Africa’s household debt still exceeds 70% of GDP.”
A further increase in the interest rates, said Rawson, will hit the home buying market hard. Mike van Alphen, National Manager of Rawson Finance, the Rawson Property Group’s bond origination division, has said that a 0,5% increase in the interest rate is likely to reduce the demand for low cost housing by 10 to 15%.
“Those who have been in the residential property sector for some time know from our previous experience that when home buying tails off, socio-economic troubles become more serious,” said Rawson.
The concern, he added, is that without an interest rate increase, inflation will run out control, possibly reaching close to 7% midway through 2016. However, said Rawson, there are many who advocate accepting this in the belief that economic growth and the creation of employment are more important goals and these can only be engendered by low interest rates.
“Many people talk,” said Rawson, “as if a 6,1% inflation rate (the forecast for 2016) is disastrous. I find this hard to believe because there have been periods in our country’s economy when we prospered despite having double digit inflation.”
In certain previous statements Rawson has said that the South African home buyer can “shrug off” minor increases in the interest rates. Why then does he now say that these will affect the demand for housing so adversely?
“The reason,” said Rawson, “is that in the current low growth economic scenario, annual wage and salary increases as well as bonuses, which previously were big enough to help absorb increased bond costs, are now unable to do so. The campaign opposing interest rate hikes is therefore based on a genuine appreciation of the consumer’s plight.”
In another statement, Rawson has said that if the banks should lighten their bond criteria – enough to allow for a 5% increase (7,500 more bonds per annum) – this he feels would be a worthwhile step forward in boosting South Africa’s overall growth rate.
“When the property media report boom conditions in certain high demand areas, e.g. Claremont in Cape Town and Fourways in Johannesburg, they are talking about price rises – which have been quite exceptional over the last two years. The less satisfactory aspect of the current property market is that roughly half of South Africas still cannot get the credit to buy a home – and it is in that situation that continued low interest rates can be very useful.”