Saturday, May 2, 2009

Save like a squirrel

Save Like A Squirrel
Jackie Cameron; May 1st 2009

Because this time the economy's different. Scary home loan graphs, worrying economic data behind South Africa's interest rate cuts.

SA Reserve Bank Governor Tito Mboweni has been cutting the interest rate at an astonishing rate since December. Yet there are complaints from some quarters that the amount he's been lopping off at every Monetary Policy Committee meeting is not enough to get the economy, and in particular the property market, humming again.

The repo rate, and along with it the prime commercial rate offered to home loan customers by banks, has dropped by 3,5% since just before Christmas.

At 8,5% - and the prime rate at 12% to bank customers - from Monday, it is now not far off where it was when interest rates were at a low in June 2006.

You'll remember 2006 as a year when we were all still happily spending on our credit cards and property purchases, both of existing homes and off-plan, were as easy as signing to say your offer was subject to a 100% bond.

You didn't need a hefty deposit, your spending details weren't excessively scrutinised and your bank manager didn't care particularly what sector you worked in or how long you'd been working in the same job.

That's a far cry from the picture now if you are applying for a mortgage. Bank managers are very nervous about giving home loans to people in certain industries, like mining.

The self-employed, including professionals like doctors and lawyers who have been loyal bank customers for many years as they have paid off study and other loans, are among those who are finding it most difficult to strike home loans these days.

Jacques du Toit, senior property analyst for Absa Home Loans, notes that although the rate has come down rapidly, reducing your mortgage repayments by a whopping 18,5%, your monthly repayment is still just over 10% higher than in June.

That doesn't sound too bad when you consider previous interest rate cycles. However, this time things really are different because we are in the midst of what now undoubtedly looks like the first recession in 17 years.

As Du Toit says: "South Africa's economy contracted at a real seasonally adjusted annualised quarter-on-quarter rate of 1,8% in the final quarter of 2008."

A further contraction is forecast for the first half of 2009, the economy is believed to be in a recession, which is regarded as two consecutive quarters of negative growth in real gross domestic product (GDP), he says.

Du Toit continues: "The economy is expected to contract by a real 0,5% this year after growth of 3,1% was recorded in 2008."

Although those numbers seem small, the impact is massive. So big, in fact, that unusually falling interest rates have failed to alter the course of property price values and sales volumes.

A graph Du Toit produced this week of mortgage advances growth and interest rates shows that earlier this decade when interest rates dropped along with inflation, the opposite trend was seen in mortgage advances growth - it went up as interest rates declined.

Now, the line is ticking down and there's no obvious sign mortgage advances will improve soon. (Click here to see Du Toit's graphs).

Commented Dr Andrew Golding, CEO of the Pam Golding Property group, after hearing of the latest rate cut this week: "In these extraordinary times with the compounding factors of the global credit crisis and local bank liquidity and credit issues, the interest rate reduction has not as yet had a significant impact on house sales."

Patrick Craven of Cosatu (Congress of South African Trade Unions) was more blunt about the issue. In a terse statement, Cosatu lashed out at Mboweni saying the interest rate cut is "much too little and far too late".

"The Monetary Policy Committee (MPC) of the Reserve Bank has still not grasped the seriousness of the world economic crisis and the impact that is now being felt in South Africa," said the statement.

Cosatu warns thousands of jobs are in jeopardy. "The Reserve Bank Governor, Tito Mboweni, has conceded that domestic output and growth are declining or negative. Yet he has once again missed a great opportunity to deliver a radical cut in interest rates of at least 200 basis points, which would ease the burden on struggling businesses, prevent retrenchments, promote new investment and give the economy a shot in the arm."

Cosatu said it has pointed out previously that other countries have slashed their interest rates. "The UK's is currently 1.5% and Japan's a mere 0.1%. Yet the SA Reserve Bank still maintains a high rate of 8.5%. The MPC is still clinging to the notion that monetary policy must be based primarily on inflation-targeting, despite the fact that the rate of inflation is going down."

Cosatu, like other organisations, reckons that "today the biggest worry is not inflation but economic recession and the developing job-loss bloodbath".

The signs are, though, that Mboweni has already changed tack as Jacob Zuma prepares to take South Africa's helm. For starters, he moved the interest rate down even though inflation doesn't look like it'll move within the target 3-6% band as soon as was hoped. Plus, Mboweni has decided on meeting even more regularly about interest rates.

As Cosatu points out, it was at the very same ANC conference that Zuma emerged as heir-apparent that it was decided the interest rate emphasis should shift to target economic growth and job creation. (Click here to read the ANC's Polokwane resolutions.)

Don't breathe a sigh of relief just yet. Use any savings you enjoy from the latest rate cut to good effect by building a nest-egg to provide you with cash in the hard times to pay for important bills - like your home loan or rent.

If you've been living up to your proverbial eyeballs in debt, wipe out your overdraft and kill your budget facility on your credit card. Cut back on store account spending and be wary of buying big ticket items just yet.

The economic signs are that life's going to get harder before it gets easier. Even Mboweni acknowledged this when he announced the rate cut this week.

He said: "The outlook for domestic economic growth remains subdued, with no indications of a quick recovery." We have been warned.

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