From our CEO Berry Everitt: Positive news takes the chill off July

July is the coldest month of year in most of SA, but this year it has brought us all some heart-warming news to stave off the winter blues – starting with the surprise decision by the Reserve Bank to lower interest rates by 0,25%.

This decrease, although small, is expected to help raise consumer and business confidence and give the economy a kickstart out of recession, coming as it does on the heels of news that the inflation rate is currently at its lowest level since November 2015 (at 5,1%), and that salaries and wages in the formal sector have begun to show some real growth for the first time in over a year.  

The decrease in the prime rate from 10,5% to 10,25% will of course mean lower monthly repayments not just on home loans but on all kinds of debt – including credit and store card balances, vehicle purchase agreements and personal loans - and taken together all these small decreases could make quite a difference to the average household.

They could also help them pay off their debts faster, which is something SA consumers are increasingly demonstrating that they have the desire and discipline to do. On a home loan of R1m, for example, the decrease in the monthly bond repayment will be R160 – but if the homeowner decides to maintain repayments at the current level, the total loan period could be cut by 12 months (and the interest savings generated in the process could top R81 000).

Meanwhile the most recent Momentum/ Unisa Wealth report shows that the total real value of household liabilities (debts) has increased by only 0,3% in the past year, and that the ratio of total household debt to total disposable income has fallen to 74,4%, its lowest level in more than 10 years.

The report also specifically notes that this is mainly due to a very slow rate of credit growth (new borrowing) by households, rather than any significant increase in disposable income, and that it underlines the determination of many households to pay off existing debts before they borrow any more.

This sentiment is echoed in the findings of the latest Old Mutual Savings Monitor, which show that many households have not only cut new borrowings but in fact also made significant efforts to cut back on consumption expenditure in order to repay existing debt as fast as possible.

The Monitor shows that the average household currently allocates 62% to living expenses compared to 68% in 2015, and has bumped up its debt repayment allocation from 12% to 16% in the same period.

The amount going to insurance and medical aid payments has also risen, from 5% to 7%, while the allocation to savings has remained steady at 15%, which is extremely encouraging considering all the economic turmoil and financial hardships that SA consumers have faced in the past two years.

And now, finally, it seems as though they are getting some relief as a reward for their discipline, in the form of real increases in disposable income.

According to the latest BankservAfrica Economic Transaction Index (BETI), the average take-home pay in SA’s formal sector showed a nominal year-on-year increase of 6,7% in June and a real (after inflation) increase of 1,3%. This was the fourth consecutive month in which there was a real increase – and the highest increase in 15 months.

The increase brought the average monthly take-home pay to R13 894, and BankServe notes that the fact that salaries and wages are once more increasing faster than inflation “should also improve the country’s consumer confidence indicators” as they start to realise that they are at least somewhat better off than they were a year ago.

Recent fuel price decreases have also helped household budgets, but this does not mean that we can expect a sudden surge in spending or borrowing. As economist Mile Schussler recently said, households recovering from the hard times of the past two years will look at increasing their spending, but only slowly. “People have realised in harder times that they can live with less, and consumers have also grown wary of taking on any new debt, no matter what interest rates do. So while retail sales are already improving, it will be some time before there is increased demand for big-ticket items.”

Nevertheless, all of the above indicators are good news for the real estate industry, because they will boost consumer confidence, as we know all too well, that is the real key to boosting economic growth, creating more jobs and converting the strong housing demand that continues to manifest in SA to actual home ownership.

So thank you, July, and roll on the optimism of Spring…