Property insights – SARB interest rate meeting

The South African Reserve Bank Monetary Policy Committee will meet to deliberate on interest rates from the 15th to 17th of January and FNB expects it to leave its policy repo rate unchanged at 6.75%.

The consumer price index inflation remains within the SARB’s 3% – 6% target range, having recorded 5.2% year-on-year as at November. It does lie to the higher end of the target range, and above the 4.5% mid-point. In addition, the November consumer price index inflation rate of 5.2% was slightly higher than the 5.1% of the prior month, and has risen all the way from 3.8% as at March 2018, a surge that some may argue justifies further rate hiking right now.

However, certain key drivers of inflation have actually improved since November, and the SARB would probably take these into account at the coming week’s Monetary Policy Committee’s meeting.

Notable in this regard is a major drop in petrol price inflation, after some softening in global oil prices late last year. From November’s year-on-year rate of inflation of 22.3% in the Gauteng Pump Price, we have moved to mild year-on-year deflation of -2.9% by January. This can have a noticeable dampening impact on overall consumer price index inflation in the January numbers, given that Transport CPI sub-index (under which fuel prices fall) had contributed a troublesome 1.5 of a percentage point to the overall consumer price index inflation rate in November 2018 (the most recent consumer price index number available)

In addition, the Rand has behaved reasonably well since the November Monetary Policy Committee meeting, recently recording very similar levels against the dollar as was the case back then.

Therefore, whilst FNB does not anticipate gradual inflation rise further out, leading to a further rate hike in 2019, they only expect that to happen in the second half of the year, with current inflationary pressures not believed to be strong enough to require the SARB to “rush” the rate hiking.

A weak residential property market assists in keeping interest rates low

The residential segment of the property market is instrumental in containing consumer price index inflation currently, and thus contributing to low current interest rates.=

This is due to the weakness prevalent in the residential rental market, which has taken the consumer price index inflation rate for actual rentals lower to 4.03% in the most recent consumer price index survey, down from a 5.7% multi-year high as at September 2017. The consumer price index for owner equivalent rentals has also slowed from year-on-year inflation of 5.4% as at September 2018 to 3.66% by the September 2018 survey.

This slowing in the two categories of rental inflation has been important to the overall consumer price index, because the two indices have a large combined weighting of almost 17%.

Housing-related operating cost items, however, are more troublesome for consumer price index inflation

While weak housing market performance is a positive for interest rates at present (exerting downward pressure on rates), certain key housing-related cost items are more troublesome for consumer price index inflation. Here FNB refers to consumer price index for the various for municipal rates and utilities tariffs. In November, the consumer price index for “Water and Other Services”, which includes municipal rates as well as non-electricity tariffs such as water, was rising year-on-year by 11%. The consumer price index for electricity and other household fuels was inflating by 7.73%. The upside risk is this latter index, with Eskom applying for further double-digit tariff hikes for the next 3 years.  Depending on what the electricity regulator decides, it is possible that such housing-related costs could pose some additional upside risk to consumer price index inflation in 2019, after already reaching rates well-above the overall consumer price index inflation rate.

An unchanged rate decision is unlikely to alter any main recent property themes

  • Unchanged rate decision would still be over-enough to keep the housing market subdued and “rational”.

Any signs of “exuberance” in the bubble-prone housing market can be troublesome to a financial system and thus to a central bank. FNB believes it thus “healthy” that interest rates remain above average house price growth, i.e. positive in “real” terms when adjusting mortgage lending rates with average house price growth. Given lowly house price growth of  4.2% as at November 2018, and Prime Rate at 10.25%, our Real “Alternative” Prime Rate (adjusting with house price growth instead of consumer price index inflation) was a strongly positive 5.89% late last year, making it very difficult to use “cheap” credit to make quick profits on capital gains.

From a housing market point of view, therefore, there is no need for the SARB to do anything on the interest rate front to contain either market “exuberance” or its rental market inflation.

  • The trend of improving residential affordability looks set to continue in 2019

Firstrand’s economic growth forecast of 1.4% for 2019, only marginally better than the estimated 0.7% for 2018, is not believed to be sufficient to lift average house price growth significantly, with the forecast growth rate still weak and unlikely to make a major impact on employment and income growth. Under these economic conditions, we expect another year of “real” house price decline, where average house price growth of 3-4% in 2019 remains below the consumer price inflation rate and more noticeably below per capita income growth.

The installment value on a new average-priced home rose by a lowly 3.1% in November, and this would have been 4.9% if FNB had added the 25 basis point interest rate hike of late-November to this monthly average number.

Therefore, even with that 25 basis point interest rate hike added, the new loan installment value still likely rose at a rate below consumer price index inflation and probably below nominal income growth too, suggesting ongoing home affordability improvement. An unchanged rate decision this coming week would continue this trend.

  • On the commercial property side, real capital value decline also likely to continue in a weak economy, even should the SARB put rate hiking on hold.

The commercial property sector is arguably less interest rate sensitive than the residential market, being to a greater extent driven by the direction of the economy and by business confidence.

It is well-known that business confidence is low, the result of a combination of a broadly stagnating economy over the past 5-6 years along with uncertainty over the future economic policy direction of the country.

It would thus probably take the 2019 general election to pass smoothly, and some greater policy certainty thereafter, to bring about a noticeable strengthening in the commercial property market.

FNB thus sees little support for the market from the SARB putting rate hiking on hold. The weakening in commercial property and the commercial mortgage lending sector began well-before the start of interest rate hiking in November.

Vacancy rates, according to IPD half-yearly data, began to rise back in 2016 in the case of office space and 2017 in the case of retail space.

Capital growth began to decline back in 2017, and by the first half of last year was already a lowly 0.7% half-on-half.

And commercial property new mortgage loans granted growth started to slow back in the second quarter of 2018, well-before the start of rate hiking in November.

In short, while an unchanged rate decision in the coming week would be more welcome in a weak property market than a hike, we believe it is unlikely to change the weak market environment noticeably.

Market sentiment is more likely to be swayed by economic growth and policy events during 2019. Current economic growth not far from 1% remains insufficient on the residential side to boost employment, household income, and thus residential demand enough to mop up supply and balance the market, and hence the real house price decline since early-2016. Similarly on the commercial property side of the market, recent years’ economic growth rates have been insufficient to sustain the demand needed to prevent vacancy rates from rising. A more meaningful GDP growth rate at least in excess of 2% would probably be required.

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Property Insights – SARB Monetary Policy Committee Meeting – January 2019