When will Stals ease up on interest rates and give=20 homeowners a break, asks Reg Rumney
Real interest rates _ adjusted for inflation _ in=20 South Africa are punitively high, especially for=20 those buying a new home, but the reaction from=20 economists and the man-in-the-street is curiously=20 muted.
The prime rate, the rate banks are supposed to lend=20 to their best customers, is 18,5 percent, and the=20 mortgage bond interest rate is18,25 percent.
Inflation dropped in September to its lowest level=20 in 23 years at 6,4 percent.
Subtract the inflation rate from the prime rate and=20 you have a rate of around 12 percent, higher than=20 any country in the industrialised world.
Yet so far the only criticism of the the monetarist=20 policy imposed on South Africans by SA Reserve Bank=20 governor Chris Stals has come from those seen to be=20 on the far left, such as former ANC economic=20 adviser Vella Pillay.
High interest rates hurt small and medium-sized=20 businesses, which do not have access to equity=20 capital _ and which may pay even more than the=20 prime rate. High rates also pose a particular=20 problem for new homeowners who face large monthly=20 repayment bills.
It is common cause that home ownership is an=20 important social stabiliser and that home ownership=20 is restricted mainly to a small, white middle class=20 in South Africa. Yet present high interest rates=20 actively militate against widening ownership of=20 formal houses.
The latest Amalgamated Banks of South Africa (Absa)=20 housing survey shows a decrease in the average=20 price, adjusted for inflation, of medium-sized=20 houses in the third quarter of this year of 3,4=20 percent compared to the same quarter of last year.
The survey puts the average cost of a medium-size=20 house at R173 000.
“In the third quarter of 1995 the monthly repayment=20 on a new 80 percent bond for a medium-size house=20 over a 20-year term was R2 125, against R1 757 in=20 the third quarter of 1994.”
So while house prices dropped in real terms, the=20 cost of paying for a modest house rose by 21=20 percent, largely because the mortgage rate rose an=20 average of 2,7 percentage points over that period.
What reasons are advanced for the bank’s high=20 interest rate policy, in the face of declining=20 inflation?
Stals has said that he considers not the present=20 inflation rate but future inflation. Here, money=20 supply is important. The broadest measure of money=20 supply, M3 is growing. Yet the correlation between=20 money supply and inflation is not convincing, and=20 strict monetarism has been out of favour for some=20 time now in the West.
According to Southern Life chief economist Sandra=20 Gordon, the Reserve Bank takes three factors into=20 account when deciding on interest rate levels:
Underlying inflationary pressures.
International interest rate trends.
Credit extension to the private sector.
Though inflation hit an historic low in September=20 it could rise again towards the 10 percent level.=20 The sharp drop in inflation was due mainly to lower=20 food prices. Yet core inflation _ after stripping=20 out food, non-alcoholic beverages and the costs=20 ofhome ownership _ has eased.
Indeed, why strip out the cost of home ownership,=20 which has a weighting of 15,5 percent in the=20 Consumer Price Index basket? The inclusion of this=20 cost in the CPI means interest rates themselves=20 contribute to inflation and the Reserve Bank can=20 contribute to a drop in the official inflation rate=20 by lowering rates.=20
It seems unlikely, says Gordon, that there will be=20 much upward pressure on international interest=20 rates during most of 1996.
The growth in credit extension is worrying,=20 particularly as, according to the Reserve Bank,=20 credit during 1995 has increasingly been used for=20 direct financing of consumption spending by=20 households. Yet Gordon notes there is evidence that=20 high rates are beginning to slow credit extension.
In its latest Quarterly Bulletin, the Reserve Bank=20 notes an alarming surge in private sector credit in=20 the 12 months to end-June of 8,5 percent, adjusted=20 for inflation.
The cause appears to be the innovativeness of South=20 Africa’s sophisticated financiers _more=20 sophisticated than the manufacturing sector _=20 taking advantage of deregulation.
Most of the R9-billion or so credit extended=20 comprises mortgage bond advances at R4,6-billion.=20 This is followed by R2,3-billion in installment=20 sales credit, and R1,5-billion in “other” loans and=20 advances, including overdrafts.
Finance Minister Chris Liebenberg, earlier in the=20 year, expressed concern over the effect of “private=20 label” credit cards.
The Reserve Bank fingers another villain in the=20 bulletin _ mortgage bonds themselves.
“The rate of increase over 12 months in mortgage=20 advances fluctuated around a level of 19,5 percent=20 in the second quarter of 1995, notwithstanding a=20 lower rate of expansion of activity in the real=20 estate market. These accounts have been used=20 increasingly by borrowers to finance purchases of=20 durable and other consumer goods in view of the=20 flexibility of some of the mortgage schemes of=20 banks and the comparatively low interest rates on=20 mortgage advances. Banks promoted this credit=20 facility on account of the low capital requirements=20 applicable to it and the low credit risk of such=20 loans.”
No one would argue for a return to the negative=20 interest rates of the past. But re-regulation would=20 ensure mortgage loans are used for their original=20 intention. Now would-be homeowners are being=20 penalised for the sins of existing homeowners, and=20 genuine entrants to the property market are=20 suffering because of the ingenuity of the financial=20 markets.