Real Estate Investor Magazine South Africa March 2014 | Page 15

UPFRONT The recent interest rate hike of half a percentage point to 5.5% surprised the market and will impact the market in a number of ways. As John Loos, FNB’s Household and Property Sector Strategist notes, the impact should be seen as “negative” from a short-term consumer point of view. While the rate hike could serve to contain household sector credit growth further and contain the debt-to-disposable income ratio in the near term, it may also raise the level of bad debts. In terms of the property market, Loos comments: “This interest rate hike is seen as a negative for growth in demand, thus likely to have a containing impact on house price growth. All bets are off regarding any noticeable rise in house price growth compared to recent levels, and single-digit price growth is expected to remain a characteristic through 2014.” However, Loos notes that the new repo rate level, which leaves the prime rate percentage at 9%, slightly above house price growth, will prevent major speculative activity in the residential market. The cost of credit The cost of credit in South Africa is nothing less than exorbitant and that is simply due to interest. South Africa has one of the highest interest rates in the world. The country’s interest rate is set by the South African Reserve Bank (SARB). Bear in mind, however, that SARB is not an organisation established to serve the people of South Africa. It is, in fact, a privately owned corporation that answers only to its shareholders, and of course its clients – the commercial banks. But 5.5% is not the cost South Africans incur to borrow money. This is the repo rate at which SARB lends money to commercial banks. All the commercial banks then add a whopping 72% mark up to this rate to set the prime lending rate at 9% pa. This is the rate ordinary South Africans pay - that is, if they can get prime rate instead of the more likely prime plus rates. So, the commercial banks borrow money from SARB at 5.5%, lend the money to the man in the street at 9% or www.reimag.co.za more, and pocket the substantial difference as profit. bank makes any effort to assess their individual creditworthiness. There have been many attempts to clarify this huge difference between the repo rate and the prime lending rate. In 2009, the then Reserve Bank Governor, Tito Mboweni, expressed concern at the magnitude of this difference. A sub-committee was convened by Banking Association South Africa and the Reserve Bank. Not surprisingly, nothing came of it. When bread manufacturers or construction companies do this - together and arbitrarily institute a fixed profit margin on the sale of a particular article - it would be branded collusion and the competition commission would issue fines and put a stop to it. But it seems our commercial banks exempted from this, entirely free to indulge in cost fixing. In 2012, Finweek published a series of articles by Garth Theunissen, and could get neither the Banking Association of South Africa, nor the Reserve Bank or National Treasury to explain how and why it was decided that the prime lending rate should be fixed at 3.5 percentage points above the repo rate. It is not like this in all countries. Theunissen explains that t