Repo rate increase will up rental prices

The repo rate hike is likely to up the price of residential rentals and could effect the Consumer Price Index (CPI), FNB's home loans department said on Thursday.

Property strategist John Loos said in a statement that the South African Reserve Bank (Sarb)'s decision to increase the repo rate to 5.5% would likely create greater demand for property rentals.

This was because people looking to buy property for the first time could delay purchasing until the interest rate hiking cycle appeared to be past.

In addition, more people were likely to sell their homes in order to downscale due to financial pressure.

In both scenarios, people would be more likely to rent accommodation.

"This all leads to one likelihood … stronger growth in demand for rental properties," Loos said.

The interest rate hike would likely further reduce the number of people buying property in order to rent it out, leading to slower growth in supply of rental properties.

According to the FNB estate agent survey, those buying properties in order to let, accounted for around 8% of total home buying, down from a quarter of the total buying market in the 2004 survey.

"The combination is likely to see higher rental inflation, just as we saw the last time interest rates peaked around 2008."

Increased pressure
Residential rental comprised 16.2% of the overall CPI, and therefore increased rental prices could in turn place additional upward pressure on CPI inflation and interest rates.

The impact could be contained, if food, oil and other CPI items remained relatively stable, but the prices for many such items were globally determined.

"Ultimately, if interest rate hiking goes far enough it will eventually dampen rental demand too, because tenants also have their financial limits and they also often have debt."

On Wednesday, Sarb governor Gill Marcus announced that the repo rate increased by 50 basis points, from its previous level of 5%, and would take effect from January 30.

"The forecast average inflation rate for 2014 is 0.6 percentage points higher at 6.3%," Marcus said.

The year-on-year inflation rate, as measured by the CPI for all urban areas, measured 5.3% and 5.4% in November and December last year.

This resulted in an average annual inflation rate of 5.7% in 2013.

She said that the global financial crisis had moved into a new phase which was posing challenges to emerging market economies, including South Africa. – Sapa

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