By: Fin24
2014-09-01 10:40
#debt #interestrates #debtrelief
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Eugene Prinsloo
Partner at Meecham, Prinsloo & Associates Paralegal Practitioners
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Comment:
Interest rates set to rise for at least the next two years, this means only one thing consumer goods will become more expensive and debt will become more expensive.
If you are having a hard time now paying all your debt it will just become worse act now.
Article:
Johannesburg - The prime interest rate in SA could rise further to 9.5% by the end of 2014, and then to 10.25% by the end of 2015, according to John Loos, FNB's household and property strategist.
He said on Monday that this, in turn, will imply some moderate increase in the household sector debt-service ratio.
This ratio is the cost of servicing the household sector debt burden expressed as a percentage of disposable income. This would slow growth in residential mortgage credit demand.
"As a result of expected interest rate hikes, we would still expect a slower average house price growth rate in 2015 compared to 2014," said Loos.
"However, from last month's slowed year-on-year rate, we would not expect to see too much further price growth slowing, with the house price inflation rate now below general inflation in the economy."
He said the key risks to the housing market outlook would be further stagnation in the economy with labour relations matters remaining highly disruptive, or alternatively, further significant rand weakening, leading to higher than expected inflation and more severe interest rate hiking than forecast...or a combination of both.
Economic growth
"The noticeably slower house price inflation rate places some downside risk to our 2014 annual average house price forecast of 7.3%, when we revise it next month," said Loos.
"However, we would not expect a major house price inflation slowdown from here onward under our 'base case' economic forecast scenario."
That is because, from here onward, FNB projects some mild improvement in real economic growth as the country heads towards 2015.
"Such an expected growth improvement is based on the assumption of some normalisation in the levels of industrial action after a torrid recent period, which in turn should support better economic growth due to less strike-related disruptions to the economy," he said.
"In this period of heightened social tensions, such an assumption is admittedly a fragile one."
FNB's economic growth forecast for 2014 as a whole is 1.5%, improving somewhat to 2.5% in 2015 on the assumption that the levels of industrial action-related disruptions will decline next year.
This scenario also assumes a reasonably well-behaved rand, and therefore no major inflation surge from here onward.
"However, against some expected economic and household disposable income growth improvement, we expect the Sarb to continue with its normalisation of interest rates, which implies further hiking from abnormally low levels," he said.
Housing market data
According to FNB's housing market data, the general picture continues to be one of a market whose pace of growth or improvement appears to have been gradually slowing down.
"The term "slowing pace of improvement' should not be confused with a 'deteriorating market'. It is not yet the latter," said Loos.
"The solid performance of the housing market continues, with a good balance between demand and supply, but this pace of growth appears to have been slowing down in recent months."
According to the FNB House Price Index, the average house price for August 2014 rose 5.4% year-on-year.
This is slower than the previous month's revised 6.4%, and represents the seventh consecutive month of gradually slowing since the 8.6% year-on-year inflation rate recorded in January 2014.
Real house price growth - that is when house prices are adjusted for consumer price inflation - came in at a very slightly positive 0.06% year-on-year in July. The August CPI is not yet available.
This represents a slight slowing from a revised 0.51% real price growth rate in June, with CPI inflation recording 6.3% in July.
The average price of homes transacted in August was R947 051.
In real terms, the FNB House Price Index for July was -20.8% down on December 2007, the month in which last decade's boom time peak in real house prices was reached.
In nominal terms, house prices by August 2014 were 20.2% higher than December 2007.
Examining the longer term performance over a 10 year period, however, in real terms the index is still 12.2% higher than July 2004, and 98.5% higher in nominal terms compared with August 2004.
While the available residential market indicators still point to a well-balanced market, the FNB Valuers' Market Strength Index, an index of FNB Valuers' perceptions of the market, has seen its year-on-year growth slowing since early in 2014.
This is in line with the slowing direction in year-on-year house price growth.
Besides a higher base effect now coming into play, this may be reflective of two factors, according to Loos.
Firstly, SA had an anaemic economy in the first half of 2014, with year-on-year real GDP growth rates of 1.6% and 1% for the first and second quarters respectively.
This, in turn, has exerted downward pressure on employment and wage bill growth for the economy, whose year-on-year nominal growth rate slowed further from 7.2% in the first quarter of 2014 to 6.5% in the secon quarter.
It is, therefore, likely that disposable income growth slowed further in the second quarter.
"Then, secondly, we have had 75 basis points' worth of interest rate hikes since the beginning of 2014 by the SA Reserve Bank (Sarb)," said Loos.
"While not yet having caused a weakening in the residential market, it is plausible that these factors may have begun to cause residential affordability, as measured by the average house prive/average income ratio and the bond instalment on the average priced house/average income ratio, to deteriorate mildly."
Such affordability deterioration could conceivably limit the rate of house price inflation.
From a revised level of 49.44 in July, the FNB Valuers' Market Strength Index rose further to 49.65 in August.
This rise is the result of a further rise in the Valuers' Demand Rating, which was accompanied by a decline in the valuers' supply rating.
However, while still rising, the year-on-year rate of increase in the valuers' market strength rating slowed for the 6th successive month after peaking in February 2014.
Real interest rate
"We remain of the belief that a slowing pace of strengthening in the residential market at the present time is a welcome development. The market has regained its health, but it should not get too far out of line with what are very weak economic fundamentals," said Loos.
"Already, real house price levels remain not far from historic highs of a few years ago and any move into another house price boom or bubble would ultimately raise the risk of another 2008/2009-style 'crisis' for the residential and mortgage lending industry."
Price booms can begin to drive speculative activity and buyer panic - where buyers rush to get into the market, fearing that if they don't do it now it will be un-affordable later - on a large scale, and thus can lead to "market overshoots".
"We thus see it as beneficial to the health of the market when the Sarb sets interest rates at levels where home mortgage lending rates are positive in real terms according to our alternative house price-adjusted real interest rate calculation," said Loos.
"Instead of converting prime rate from a nominal to a real rate using CPI, we instead use the FNB House Price Index."
When this version of real prime rate is significantly negative - as it was back around 2004/2005 - that is where house price inflation exceeds the prime rate percentage, it can imply a favourable environment for short term speculation in residential property, according to Loos.
"Currently, our alternative real prime rate is positive and rising, at 3.8% in August, up from a previous month's revised 2.6%, gradually rising as interest rates are hiked and house price inflation slows," he said.
"This mild rise is seen as a further welcome development in order to promote a 'rational' residential market."
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EUGENE PRINSLOO
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