The true cost of borrowing: South Africans are losing their homes due to high interest rates
By Renier Kriek
Unethical and unjustifiable – that's how the hesitation by the SA Reserve Bank (SARB)hesitation to take decisive action in reducing the interest rate is described. This is in spite of CPI inflation having dropped to 3.8%at the last publication - well below the SARB’s midpoint target of the range between 3% and 6%.
SARB’s next Monetary Policy Committee (MPC) press conference will be held on November 21.
I believe that if the Reserve Bank fails to announce a rate cut of at least 50 basis points, its decision-makers should take ethical responsibility for the undue hardship being placed on South Africans.
Blame it on the model
The MPC keeps reminding South Africans that it is bound to its inflation targeting mandate, focused exclusively on inflation and nothing else. It determines compliance with that mandate by using its so-called “model” which, to the public, is a black box completely opaque to outside scrutiny.
Such statistical models are always an approximation and vast simplification of the economy, which is an immensely complex system - especially when it comes to inflation and its interplay with other economic variables.
No matter which factors or variables the SARB’s econometricians employ, the model must always include largely subjective judgement calls.
In addition, inflation targeting is a relatively new paradigm, first introduced in New Zealand in 1989 and implemented by South Africa in 2000. Now, it’s assumed to be gospel even though it is not universally adopted by the world’s central banks.
A blow to the economy
Even if one takes the MPC at its word, inflation has been dropping steadily and is below pre-pandemic levels. This is well below the midpoint of SARB’s target band. If it does indeed follow only the inflation targeting mandate to the exclusion of all other considerations, SARB’s MPC should be cutting the interest rate aggressively.
If inflation targeting employs an increased interest rate to dampen spending and thereby bring price increases down, then it has already achieved this outcome. Yet, in reducing the rate by a mere 25 basis points in September 2023, SARB has left South Africans facing continued and avoidable economic challenges.
In the greater context, people are losing their homes and are under immense financial pressure, with food prices having increased by 50% over the past four years. Poorer South Africans cannot afford to feed themselves or their children properly, and they are facing food insecurity and malnourishment at alarming rates.
This is because jobs are not being created and the GDP is not growing as it would have if the real interest rate was lower.
The impact on the property industry
The property industry is seeing growth among those in the top 30% of South African income earners, even though there is low demand in this segment. This is because banks are flooding that market with relatively easy money to offset the growing rate of home loan defaults.
The National Credit Regulator’s previous Consumer Credit Market Report indicated that 92% to 93% of home loans were typically not in arrears. That means 7% to 8%t were defaulting.
However, recent data from the second quarter of 2024 reveals that only 87.8% of home loans are paid up to date. So partial or full non-payment has increased to 12.2%. That is an increase of more than 50% in homeowners missing payments.
The resulting loss of homes and other properties can be directly attributed to the high interest rate. We must realise that the high interest rate does not lead only to direct pressure, in the form of a high instalment for the individual homeowners, but also has indirect effects. The opportunity cost of maintaining an overly cautious monetary policy is having a significant impact on our economy.
A window of opportunity
South Africans are under assault from factors outside their control, such as foreign conflicts and economic disruptions that impact both import and export costs and opportunities, with the country’s commodity exports being especially hard hit. There’s also the uncertainty about how the incoming Trump administration might affect inflation in Africa.
So, the country has a small window of opportunity presented by current low inflation, where a reduced interest rate could stimulate the economy and bring some relief to its citizens in the form of economic growth, fixed capital formation, and job creation to ease our dizzying levels of unemployment and economic hardship.
The MPC is not bound to its regular announcements but can make extraordinary adjustments to the interest rate as it did during Covid-19, should the fears of upward pressure on inflation prove warranted. This means it can immediately reduce the interest rate and, if any risks suggested by the model eventuate, simply increase them again when and if necessary.
SARB's cautious and conservative approach to monetary policy is no longer beneficial to anyone, and it's time to consider an alternative path forward. Why continue giving the patient bitter medicine if the illness is healed? The possibility of a future illness is not a good enough reason.
Renier Kriek is the managing director of disruptive home financier Sentinel Homes
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