The South African Reserve Bank’s Monetary Policy Committee raised the key monetary policy interest rate – the repurchase, or repo rate – by a further 25 basis points from 6% to 6,25% per annum.
Due to the hike in the repo rate, commercial banks are to lift their prime lending and variable mortgage interest rates to 9,75% per annum, effective from 20 November 2015. These lending rates form the basis for extending credit to consumers and the business sector, and have risen by a cumulative 125 basis points since the start of 2014.
The outlook is for domestic interest rates to rise further during the course of 2016 and 2017 to curb inflationary pressures and the possible effect of rising interest rates in other parts of the world.
Herschel Jawitz CEO OF Jawitz Properties says that the decision to raise interest rates will be another knock to an already delicate economy and financially fragile consumer. However these factors need to be balanced with the expectation of rising inflation in 2016 – a weak currency and the prospect of rising US interest rates.
From a residential property point of view, demand for property has already slowed to some degree in 2015. A marginal impact on demand which remains firm, despite the economy, would be expected. The increase of 25 basis points will add an additional R170 per month on a million rand bond bearing in mind that this is after tax money or approximately R250 in before tax money at a 30% marginal tax. Add this to the last rate increase and buyers and homeowners need to find an additional R500 per month. The amounts are small but everything builds on each other.
“Property prices have been growing at a slowing rate in 2015 so there is no steam to take out of the market. In addition, despite there being fewer buyers than last year, stock is still in short supply and this should continue to keep property prices firm especially in the large metro areas. The simple fact is that the increase is a necessary evil that will save the country a whole lot of pain in the future,” he says.
Sanjeev Orie, CEO of Business Value Adds:
“Given the tough economic conditions that SMEs are already facing, the increase in interest rates will add more pressure by making debt more expensive. Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases.
For most of the middle class consumers, a rate hike typically means an increase in mortgage and vehicle repayments. This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments.
As a result, small businesses may run into cash flow problems, making it difficult for them to manage running costs and payments to staff and suppliers for goods and services. Moreover, the possibility of further interest rate hikes next year will require SMEs to place more emphasis on their annual cash flow forecasts and regularly review them as business conditions change.
Difficult trading conditions coupled with natural resources constraints are likely to make things more difficult for SMEs in the coming year. SMEs in the import and export sector are also being heavily hit by the depreciation of the rand, made worse by the combined effect of rising inflation.
Higher interest rates could also discourage businesses from expanding as the cost of expansion becomes increasingly more expensive. Most start-up businesses have little equity and rely on debt. However, businesses with low gearing and high levels of excess cash may benefit from high interest rates since the excess cash can be invested for a higher return”.
Morné Cronjé, Head of FNB Franchising:
“For any franchisee or franchisor an increase in interest rates will mean that the cost of borrowing rises and will also mean an increase in the monthly expenses. A rise in interest rates discourages investment in the franchise industry and makes it difficult for franchisees to borrow money to finance their operations, payroll and general purchases.
Franchise owners need to be savvy and come up with real ways to increase their cash flow and cut unnecessary expenses. The more you understand the fundamentals to maintaining your business, the more likely it will survive. The interest rate increase will ultimately put additional pressure on an already stretched South African consumer.
Franchise concepts eventually evolve with time due to global influence and trends. Franchisors should be aware of the volatile economic environment and tweak their business plans where needed. While the franchising industry is expanding in various sectors such as fast food and retail we need to ensure that franchises remain relevant and if in debt seek professional help”.
Attie Anderson, Head of Business Lending – FNB Property Finance
“Commercial property investors will be negatively affected due to a decrease in consumer spending, which will impact them directly if they are trading from the property, or indirectly if their tenants suffer as a result of the interest rate increase.
Moreover, this could lead to tenant vacancies or rental arrears, and may even force investors to reduce their rent in order to prevent tenants from vacating and seeking more affordable rentals.
Commercial property investors that experience cash flow strains should approach their banks for financial assistance. This will give the bank an opportunity to assess the situation and perhaps find alternative repayment solutions, rather than follow the undesirable route of foreclosure in cases of default”.
Dawie Maree, Head of Information and Marketing – FNB Agriculture:
“The interest rate increase will put more pressure on commercial farmers that are already facing rising debt levels due to the weak rand and severe drought which is pushing up input costs.
Struggling livestock farmers will be hardest hit, since they have already sold off some of their stock and used the funds to cover debt. Therefore, they can no longer afford to sell more stock to account for the interest rate increase. Affordability will be a major issue, especially disposable income to buy farm feed.
Because consumers will be hard pressed, we are likely to see a lower demand for agricultural commodities in the long term, especially for luxury products.
On a positive note, we might see retailers absorbing the interest rate increase, in order to draw more customers into their stores, by not increasing costs for staple foods such as bread and milk”.
Lew Geffen, Chairman of Lew Geffen Sotheby’s International Realty, said yesterday’s announcement was a double-whammy for cash-strapped home owners.
“A rise of 25 basis points is not large in itself, but this will be the third increase in little over a year and when one factors in the 8% to 11% increase in transfer fees imposed to swell government coffers, it puts immense strain on the housing market”.
“There is also a knock-on effect for consumers. The South African economy is stagnant, the currency is under enormous pressure, we are facing the prospect of having to import staple food stuffs for the first time in nearly a decade and electricity prices will continue to rise at a rate far above inflation”.
“We are already seeing growing debt defaults and the irrational exuberance that prevailed in the property market previously has calmed down to just exuberance,” said Geffen.
“In 2016 house prices will continue to rise driven largely by stock shortages, but not at 2013/2014 rates. We’re likely to see year-on-year price increases slowing to around the rate of inflation from the 8% to 10% we’ve been seeing in recent years”.
“Sellers need to curb their expectations and with more rates hikes in the offing, 2016 will not be an easy year for home owners.”
The impact of the interest rate increase will vary from farmer to farmer depending on the size of their operation. We encourage farmers that are struggling to service their debt to seek financial advice and approach their banks for assistance.
Read further here: Interest rates (19 Nov 2015)
