As we enter 2019 the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) increased the key monetary policy interest rate – the repurchase, or repo rate – by 25 basis points from 6,50% to 6,75% per annum at the latest 2018 MPC meeting. As a result, banks announced that its prime lending and variable mortgage interest rates will increase from 10,00% to 10,25% per annum. This trend of rising interest rates might continue upwards going forward as the Reserve Bank focus of inflation targeting will continue and will weaken the market demand.
According to Tony Clarke, MD of Rawson Properties says that politics and the economy are factors to blame for poor national house price growth during 2018 – a situation unlikely to see any real relief before elections in May 2019.
“Year-on-year residential house price growth in 2018 has averaged at around 4.1%, nationally,” says Clarke. That’s below CPI at 4.6%, which means prices are effectively in a marginal decline. Properties have also been taking longer to sell, spending around 17 weeks on market. That’s a common trend in a buyers’ market like the one we’ve experienced over the course of this year.”
Some real estate markets are showing similarities to 2007 prices especially in the United States; in some places it is even exceeding prices from a decade ago. Does this mean we’re headed for an economic crash? Billionaire hedge fund manager Ray Dalio seems to think so as he sees parallels between the United States today and the 1930’s. He says,” the next financial crisis will threaten capitalism and democracy because of the combined effects of debt, pension and health-care burdens. The wealth and opportunity gap creates polarity and populism, and less effectiveness of central-bank policies that makes it more difficult to reverse a downturn.”
He goes onto say debt, left unattended, can mutate from benevolent builder to malevolent destroyer. Rising income inequality is a stark reminder that just as debt can devour, so can an economic system. When that system works well for a select few but sputters for the rest, resentment and anger swells.
Johann Rupert, billionaire businessman seems to support Ray Dalio’s theory by saying that the world is showing very similar signs akin to the 1930’s. He says, “People don’t really realise the trouble that we are in. Because of US President Trump’s emphasis on trade wars and populist approaches can result in a major recession by 2020. This can have a run over effect into South Africa. While it is not all doom and gloom it can also be filled with massive opportunities with a focus on growth, cash flow, reducing debt and building a cash pile for investment opportunities.”
One of the best “investments” open to reduce debt for ordinary consumers at the moment is just paying off the bond on their own home or an investment property, says Rudi Botha, CEO of BetterBond, SA’s leading bond originator. On a R1m bond, for example, paying an additional R800 a month will enable you to pay off your home in 16 years instead of 20 – and save more than R300 000 worth of interest.
“Equity is the difference between what your home is worth to current buyers in your market and what you still owe the bank on your bond, and it is very useful to build it up in case you ever need quick access to a lump sum of money to cover a medical emergency, or money to pay for a child’s education or finance a buy-to-let investment. You should just make sure you have an access-type bond to enable you to do so.” “Sectional title properties and security estates have definitely become the most popular property types with buyers, and have retained their value very well as a result,” says Tony Clarke. “Student accommodation and homes near business hubs are also highly sought-after and growing in value, as are retirement properties which are in pitifully short supply here in South Africa.” Clarke says property owners should prepare for continued slow growth into 2019 – at least until elections provide more clarity on where the country is heading.
“The financial crisis of 2008 was not caused by investment banks betting against the housing market in 2007. It was caused by the fact that too few investors – including all of the investment banks – bet too heavily on the housing market in the years before 2007.”