Bugle Sales Talk Editorial

Two members supported a 25 basis point increase and one member supported an unchanged position. The majority vote prevails and on 29th January the repo rate was increased by 0,5% and prime interest rates throughout the banking sector immediately followed with an increase to 10,25%. To put this increase into perspective, a R1m mortgage bond with a term of 20 years now costs R9,816.43 monthly to service it - an increase of R331.26 or 3,5% from the week before.

If interest rates were to increase by another 50 basis points in two months time (likely) monthly repayments on the same R1m bond will increase by R335.86 or 3,42%. If hypothetically a larger rate increase of 100 basis points follows this in four months time, taking prime interest rates to 11,75%, then the repayment on R1m goes to R10,837.07 per month, an increase of R684.78 or 6,75% p.m. These increases, although inconvenient, can me handled by most bondholders, if they do not at the same time have additional consumer debt they are trying to service at the same time. When we consider that, according to ABSA, the total value of household mortgage balances in South Africa as at the end of December was R864,6 billion, then an increase in rates from 9,75% to 11,75% costs these mortgage holders R1,168,852,740 or just over a billion Rand per month more. This is a billion Rand a month less to spend on other goods and services in the economy. When you think of it in its aggregated impact on the general economy it suddenly makes sense why relatively small increases in interest rates can have a significant impact on the economy.

The Reserve Bank's report highlighted CPI inflation, up to 5,2% in December from 4,8% in November is the primary motivator to increase the repo rate. The key drivers of CPI Inflation are identified as food price inflation and the depreciating Rand exchange rate. CPI Inflation averaged 4,6% in 2015 and is now expected to average 6,8% in 2016 and 7% in 2017. We are therefore in for a rough ride in terms of higher inflation. The Reserve Bank is predicting a peak of 7,8% in CPI Inflation between the 4th quarter of 2016 and the 1st quarter of 2017.

A snap shot of the current value of the Rand puts it at R15.89 against the US Dollar, R22,95 against the Pound Sterling and R17,41 against the Euro. While I was with a client looking at a property in Zimbali, he mentioned that he was pleased that he had not bought a year ago as the exchange rate had depreciated by more than 25% over the period, making our properties significantly cheaper now than a year ago when priced in US Dollars. According to Bloomberg the Rand:US Dolar exchange rate a year ago on 2nd February 2015 was R11,49. This is 38,29% lower. This explains the sudden interest in our properties by buyers who are basing their decisions in hard currencies. Our real estate has rarely looked this attractive before. The dilemma facing many such buyers is the uncertainty regarding the future expected value of the Rand exchange rate. Is this a peak we are experiencing or a general trend leading to further depreciation? Even with this uncertainty, our property prices may prove too tempting to resist for US Dollar based buyers.

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