South Africans however awaken to a reality that is cause for some anxiety; from a lagging economy, a Rand that tends to weaken more often than it strengthens, annual consumer price inflation dips, and now the threat by Moody’s to downgrade SA’s sovereign debt to junk status. We’ve been here before, we’ve avoided it before, can we survive again?
Daniel Silke, political economy analyst and futurist, to clarify the situation. “We really are on a knife’s edge. The only thing standing between us and the downgrade is the pending announcement of the restructuring of Eskom, and that decision needs to be made as soon as possible, and in a credible fashion. It does however have to be a bold plan, not a half-hearted effort and I think that if there is sufficient confidence in a restructuring plan it could save us from the Moody’s final downgrade.”
Interest rate hike?
A junk status downgrade will mean that South Africa will have to pay more to raise the money it needs for economic growth, and for its key projects to be actioned, and when government seeks to borrow money, locally or internationally, it has no option than to recover those borrowings from South African consumers. How that is done is usually through interest rates, which if Moody’s does downgrade the country, will most likely rise again, or introduce tax and levy increases thus further burdening already indebted South Africans’, impacting on their monthly home loan and vehicle finance repayments.
A higher interest rate however can limit the rate of economic growth but Silke does not believe that any interest rate hike will dramatically affect the housing market. “Interest rates are fairly benign here, so I would argue that any increase by the South African Reserve Bank would not be more than a quarter basis points. This is not really enough to assist the property market, which is now functioning on political confidence more than anything else, and clearly interest rate manoevrings, in their limited way, don’t have any substantial influence on, for example, the equities markets on the Johannesburg Stock Exchange.”
The property market is similar to that of the stock market, explains Silke, in that one has to be wary of selling in a declining market. “There is ample evidence that property prices have come down across not just the luxury end of the market but mid-market too. One should therefore, in my opinion, be cautious about panic-selling. South Africans are increasingly in debt and paying off a bond might be a better bet than selling right now.
“However when everybody sells the price comes down but those selling will have to adjust their expectations quite substantially and take a knock. That said you can never time the selling-and-purchasing processes perfectly. On a big asset class like property, I would strongly caution on taking any kind of panic view in terms of what to do going forward.”
Consumers hard hit
The wait-and-see approach is something that South African home owners have become adept at doing, paying in the meantime for increases such as annual council services, and fluctuations in fuel prices that impact on costs across all sectors. With the forthcoming National Health Insurance (NHI) there are indications that the public will experience one of, or a mix of, general tax revenue increases, payroll taxes, and surcharges on personal income tax. The NHI is some years away from being implemented but it is a consideration that has to be factored into budgets now, especially for those facing retirement.
With corporates already taxed to the hilt, personal tax is likely to be where the government will seek recovery, but, says a recent Debt Rescue survey, 24,8% of consumers are already in debt to pay for their day-to-day expenses. 43% of respondents claim they are directing more than 50% of their monthly income to debt. How much less consumers can live with is going to be tricky; even a staple like bread is experiencing an annual price rise of 7.9%.
Cause for optimism
Be that as it may, there is increasing conversation around Buy-to-Let, particularly co-ownership, be that among friends or families, to avail of the current buyer’s market conditions. Banks have become very accommodating in providing home loans and the recent interest rate decrease has certainly helped. There is also a good demand for rental properties as Baby Boomers and GenX experience the empty nest syndrome and want to downsize without the burden of a bond. Throw into that mix #GenerationRent; they are looking for rental properties close to business hubs thereby reducing expenses on transport.
The market is always going to be volatile; and the real estate market has long been considered a reflection of the state of the economy. When asked how bad the economy could get Silke used the adage that things always get worse before they get better. “In that spiral things have gotten worse, so it’s a difficult question to answer. However this is a critical moment in SA’s recent history where clearly some very tough decisions have to be taken by our President and his team.”