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Rate increase, April price hikes fuel debt time bomb - expert

Mar 17 2016 20:05
Carin Smith

Cape Town - The SA Reserve Bank's (Sarb's) latest hike in the repo rate by 25 basis points to 7% will blow everyone’s budgets, warned Ian Wason, CEO of DebtBusters.  

"South Africans cannot absorb any more increases in their debt repayments. This announcement does not bode well for South African consumers, as the Sarb’s decision to increase interest rates means that they will be paying even more toward their debt," he explained.
In his view, the timing of this rate hike is extremely bad for most South Africans for a number of reasons. These include the debt to income ratio among South Africans which is already too high, leaving little or no money for living expenses.

Consumers also have already had to endure too many price increases this year, as well as two consecutive hikes in the repo rate and high food inflation.
"Still on its way, are increases in the petrol levy (April 1) and Eskom’s 9.4% electricity tariff hike (April 1)," he warned.
The rand also continues to weaken, negatively impacting the SA economy and forcing prices even higher, not to mention the likelihood of lower salary increases and higher unemployment.

"The knock-on effect of this repo rate increase is that the cost of food, transport and rentals will climb even higher as stores, transport operators and landlords try to pass along the cost of their increased expenses onto consumers. Consumers can’t tighten their belts much more, without compromising their standard of living,” warned Wason.

When announcing the latest rate hike, Sarb governor Lesetja Kganyago said as long as prices - especially food prices - are rising, the purchasing power of consumers' incomes is declining.

"Those in upper income brackets can find ways to protect against inflation and as such when one sees inflation rising, the first thought should be what is the impact on the poor for they cannot protect themselves against inflation," he added.

He also referred to the impact of the drought on these food prices.

READ: MPC hikes repo rate amid 'tightening cycle'

From a property point of view, Dr Andrew Golding, chief executive of the Pam Golding Property group, points out that, although SA is currently in an upward repo rate cycle, interest rates are still not near the highs experienced in 2008 and are not expected to increase significantly during the year.

"So, although housing activity in South Africa has slowed along with house price growth, the demand for homes remains strong and the market retains its resilience. This is further demonstrated by the market confidence shown by astute and experienced developers, who continue to bring new stock to market in high demand areas where uptake is brisk," he said.

For Samuel Seeff, chair of the Seeff property group, a tough economy with poor growth and rising costs and interest rates is the general theme for this year.

The economic landscape is further dominated by a potential downgrade of the country’s sovereign credit rating to junk status, something that will have a profound impact on the economy and property market.

He said the rising rates and costs are impacting housing affordability, especially for the bulk of buyers who require mortgage bonds. That consumers and home buyers will find the going tough this year is unavoidable, but Seeff says that we should not get too drawn by the negativity.

Like Golding, he too says that, despite the economic challenges and headwinds, SA is still seeing a resilient market.

"It is slowing, that it inevitable, but there is no disaster in sight and no need for buyers and sellers to panic," said Seeff.

"Buyers need to budget carefully and buy well within their means and factor in additional rate and cost hikes. On the flip side, sellers need to be mindful that prices are under pressure and the time for high price expectations has come to an end."

Adrian Goslett, regional director and CEO of RE/MAX of Southern Africa, said consumers will be required to tighten their belts once again, although many may not have any notches left to tighten.

He noted that economists from banks around the country have warned that the rate is likely to increase by at least 2% during the course of the next two years.

"Considering the rising cost of utilities and food this will negatively impact the property market and affect consumer confidence," he said.

ALSO READ: Kganyago: Sarb will defend its independence

debtbusters  |  sarb  |  sa economy  |  money  |  debt


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