Pam Golding Properties Group Newsletter
PGP logoDate: January 2012

Oil’s housing windfall

The oil price slide down the slippery slopes is good news for the housing market – and for consumers in general. Basically, the lower cost of fuel puts more money in householders’ pockets thus improving all round affordability. At the same time our inflation rate, which had been hovering dangerously above the SA Reserve Bank’s upper target level of 6%, is falling fast – which could convince the Reserve Bank not to increase interest rates, or even lower them!

Some indication of the Bank’s mood will come from the meeting of its Monetary Policy Committee on January 29.

Economists now expect consumer price inflation to moderate to around 4,5% by mid-year. At that level, or perhaps even before, the Bank may be tempted to lower the Repo Rate to help stimulate the country’s flagging economy. At present the rate is 6,5%, setting the Prime Mortgage Rate at 9,5% - high by world standards. Repayment costs are a burden on many bondholders. This could ease, adding to households’ disposable incomes and improving their ability to service debt.

Imported inflation, particularly oil and food, has been a millstone around the economy’s neck. However, global food prices have also been slowing. A major input to SA food prices is the cost of distribution; South Africa is a big country with a failing rail transport system, so most consumer goods are transported by road. Thus the price of fuel is a major cost factor.

Logically, the fact that crude oil prices have dropped some 50% since the beginning of 2014 resulting in sweeping reductions in petrol and diesel prices, these distribution costs should have narrowed considerably. However, such benefits take time to work their way through the system. Cynics, on the other hand, claim that these cost benefits never do, so consumers should keep an eye on supermarket prices. At least, food prices at the till should not increase.

The net benefit of lower inflation and lower household costs is that it improves affordability. In terms of the steadily improving residential property market this is important. House price inflation is, according to the Pam Golding Price Index, rising at 7,14% and is forecast to accelerate during 2015. One negative effect is that as house prices rise they can increase beyond prospective purchasers’ pockets and their ability to repay debt – or even qualify for a reasonable mortgage bond.
The improved affordability emanating from the oil price slump should negate this.

An exciting year is ahead for the housing market.

Stuart Murray

Monterey, 12-14 Klaassens Road, Bishopscourt, Cape Town, 7708, South Africa