Bugle Sales Talk Editorial

Author: Andreas Wassenaar
Date: 2016-01-29

Have you noticed an increase in the general prices at your favourite restaurant recently? Have you noticed the change in your grocery bill? Last week the December Consumer Price Index figures were released by StatsSA. Headline inflation rose from 4,8% to 5,2% in December. The food component of the CPI inflation rate rose from 4,8% to 5,9%. The producer price index for Agriculture has risen to 10.75%. This measures the escalation of prices to the food production process and these higher costs then make their way felt through to the consumers at restaurants or grocery stores. Because food is an essential part of what we as households typically consume, higher food prices have the ability to impact on the ability to service debt, including mortgage debt.

Higher local inflation also motivates the Reserve Bank Monetary Policy Committee to increase interest rates, which directly impacts on the cost of debt and residential buying demand. The widespread national drought is one of the drivers of higher food inflation by limiting the supply. As expected food inflation impacts the lower income groups more than the higher income groups. First time residential property buyers are more affected than the buyers of more expensive properties. The recently published FNB report on CPI Inflation categorizes CPI Inflation across five different expenditure quintiles (which it uses as a good proxy for income groups) and measures the respective inflation rates to get an understanding of how different the rates can be. Their figures indicate that the lowest quintile or income group is experiencing inflation of 5,68% versus the higher quintiles at approximately 5,15%. Although the difference is evident it is not as large as what I expected.

The FNB report makes the point that Housing CPI is actually higher than food inflation at 6,6% for December and that it has a larger weighting in the headline CPI figures contributing as much as 1,6% to the overall 5,2% CPI inflation rates. Food inflation only contributes 0,9%. Within Housing CPI the main drivers of higher prices are Municipal Rates and Utilities tariffs and this is where the dramatic increases in the cost of electricity makes its impact. The Rentals inflation rate has risen and specifically the Houses and Townhouses sub-component. This is interesting as it may be the first signs of a trend of more people moving to rent rather than buy as affordability and disposable income comes under pressure. More people chasing a smaller stock of rental opportunities drives rental rates higher.

The resultant rise in residential property rental yields will make investment properties more attractive and we can expect the number of buy to let purchases to increase accordingly. It is also interesting that the CPI component for Home Maintenance and Repairs declined from 1,6% to 1,2% showing very low growth across this category. One explanation can be that people decide to spend less on home maintenance as their disposable income is squeezed. This is never recommended as the impact of lower maintenance on a property becomes evident over time and compromises the seller's ability to realize a sale or the best possible price.

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

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