Bugle Sales Talk Editorial

Our headline inflation dropped off remarkably from a peak of 6,6% in mid-2014 to 3,9% in Feb 2015 thanks to the dramatic decline in oil prices. However the fuel price hikes in March and April of this year and the introduction of the additional fuel tax has translated into an immediate increase in our local inflation rate to 4,5% as of April and is expected to peak at just over 6% early next year. As a property owner increasing inflation means higher interest rates on the horizon and therefore a higher cost of servicing existing mortgage finance.

The Reserve Banks repurchase rate is currently at 5,75%, which was hiked a cumulative 75 basis points (or 0,75%) over the 2014 year. Further increases are now expected from September of this year onwards. It is interesting to note that although the prime interest rate in South Africa is 9.25% the effective average interest rate paid by households is as high as 11,98% - a full 2,73% above the prime rate. Gone are the days of finance being provided at prime minus 2 percentage points which was the norm during the 2006/7 boom period. Banks and financial institutions are still nervous and are pricing in the additional risk they perceive to compensate them for providing finance. The growth in all household debt remained low at below 3,5% during the first half of 2015. What I call the "good" debt - mortgage debt on homes which grow in value over time, showed growth at an even lower 2% rate. Household mortgage debt balances account for more than 77% of total secured credit (or debt) balances held by households.

The growth in what I call the "bad" debt - unsecured credit balances (credit card debt, overdrafts and general loans and advances) was around 5% year-on-year growth since the end of 2014. The "general loans and advances" component of unsecured debt makes up as much as 60,7% of household unsecured credit and consists of personal loans and micro-finance. Unfortunately there are many people in our economy that rely on this finance to try and make ends meet and incure the high cost of this debt. The ratio of household debt to disposable income was marginally lower in the 4th quarter 2014 at 77,6% from 78,1% in the 3rd quarter. It is important that this key ratio comes down before mortgage finance is able to again increase at a higher rate. Although this measure is down from the peak 84,4% for 2009, it is still high in compared to historical levels and still indicates a very indebted household sector. Real household disposable income only grew at 1,5% in 2014 down from the 2,5% and the 2,4% for the prior two years. Current forecasts are for growth of 2,3% for 2015. The newly adjusted transfer duty tax rates has meant that this tax decreases for properties up to R2,650,000 and increases for transactions above this amount.

For higher priced properties the transfer duty is 11% for every Rand over R2,250,000 of the selling price. This is up from the 8% top rate previously and becomes significant to pricing achieved for properties in the R10m plus bracket. Revenue raised by transfer duty is budgeted at R7,3bn in the 2015/16 year, which sounds like a lot but is only 0,7% of total tax revenue.

For further information and an interactive analysis of this article follow my blog: andreaswassenaar.blogspot.com.

Andreas Wassenaar

Principal - Seeff Dolphin Coast

Cell: 082 837 9094

andreasw@seeff.com