September 2014 Rates Watch – Where to from here?

No predictions this time just a few thoughts on the South African Reserve Bank’s decision to keep rates steady at 5.75%

After months of warnings the Reserve Bank finally increased the interest rate in July (thankfully this was as I had predicted). I feel that this 0.25% increase was implemented not as a means to directly influence the economy but because the SARB had painted itself into a corner with its own warnings: it had to flex some muscle or appear weak.

Unfortunately there is little the Bank can do in the current economic climate beyond this limited show of force and as expected it has returned to its “wait and see” agenda. The bank has been prevented from making the necessary increases to the rate in 2014 thanks to the strike action in key sectors, government inability to boost growth and high (and growing) consumer debt.

African Bank is a prime example of the dangers posed by the rampant short-term, unsecured lending that is currently being aggressively pursued by several financial institutions in South Africa. The debt burden on the average South African is unsustainable at current levels and has severely limited the options available to the SARB. Unfortunately this is a problem that cannot be solved by the central bank and instead will likely have to be tackled by legislators. Don’t hold your breath.

Thus we remain at the mercy of global market forces without the (limited) shielding that SARB can provide. Fortunately these forces, despite a weakening currency, have not been particularly harmful and yet they haven’t been helpful either.

Barring major challenges from local or international forces the SARB will likely continue along a similar path well into 2015 until its own words of warning force it into action again.

What does this mean for the property market?

With less money (thanks to inflation and economic stagnation) and more debt there will be a slight decrease in buyers who can qualify for home loans and at the same time there will also be more pressure on home owners to sell. This will cause downward pressure on property prices but unfortunately it will take home owners some time to realize that their asking prices are no longer realistic.

In 2015 I recommend that if you are looking to sell quickly you may want to consider revising your price and lowering your expectations. And the bold buyer with cash or the ability to secure finance might be able to scoop up a bargain again.

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