Economist flattens fear of runaway interest rates

 
FNB's John Loos
Fears that the homeloan interest rates could hit the highs of 1998 when they burst through the lower to mid twenties percent mark after rising 725 basis points in less than two months has been firmly crushed by FNB property strategist John Loos, according to an article in the Sunday Tribune Property Guide.

Focussing on the early June 50 basis point increase and gathering prospects of further hikes Loos told a recent FNB Commercial Banking sponsored Ballito property investment breakfast that it was important to understand that the runaway highs of 1998 had been caused by government tasking the Reserve Bank with the role of intervening to protect the external value of the rand.
This was no longer the bank’s brief and its focus now was on CPIX inflation, which while influenced from time to time by rand fluctuations, would not be aggressively supported by the Monetary Policy Committee (MPC) as it had been in the past.

If the Reserve Bank had still been primarily rand protective then interest rates, Loos said, would have increased by three percentage points to support the currency’s latest weakening. He pointed out that the bank had signalled it’s shift in emphasis in its response to the currency’s substantial weakening way back in 2002 with adjustments of 400 basis points to combat food price inflation which had in fact been much higher than in 1998.

He viewed the currency’s recent weakening as a mini run of the 2002 scenario but expected it to be of short term duration and not a major issue for the economy, which he believed was still on a “pretty positive growth path.”

However, it was evident that the residential market was slowing for the time being with house price growth inflation expected to continue to slow well into 2007, but he discounted it suffering from a bubble or any sort of crash in the next year or two on the back of the surge in house prices as some speculators believed.

These surges, while impressive, were price adjustments that were not irrational or devoid of logic.

He illustrated his rationale by pointing out that in 1998 the number of households capable of affording to purchase the average priced house of R226 712, according to Absa’s figures, at that time stood at 1,026 million. The average prime rate at that time was 16,9 percent with such a purchase requiring monthly repayments of R3 307.

If there had not been any house price inflation from 1998 to the end of 2004 the rapayment value would have dropped quite substantially while disposable income would have grown at a more rapid rate to allow more than 2,8 million households to purchase an average house.

There had been no way the building supply chain could keep up with such growth in demand resulting in the very strong adjustment in house prices. “And this had been exactly what had happened by the end of 2004 with the average house price settling at R633 000 and the number of households able to afford to buy at 1,081 million. “This was about 50 000 more than in 1998 and a necessary price adjustment that needed to take place and did take place. It was not an irrational bubble.”
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