South Africans held their collective breath when President Jacob Zuma fired former finance minister Pravin Gordhan and replaced him with the former minister of Home Affairs, Malusi Gigaba. The repercussions were not long in coming, and Standard and Poor’s (S&P) released a public statement that it, one of the world's largest credit rating agencies, had notified the new minister that it was downgrading the country’s sovereign credit rating to junk status just hours after his appointment. The rand also reacted immediately, going into free fall in the days after the announcement was made. Rating agency S&P's downgrade of South Africa to sub-investment status will have a negative impact on the housing market and consumers as a whole. Homeowners with high debt levels should brace themselves for interest rate increases. They will need to focus on reducing their short-term debt as soon as possible and consolidate long-term debt by increasing repayment instalments to eat into the outstanding capital debt faster. What does the downgrade mean for the country? A junk status means that it will cost more for the government to borrow money, which in turn will have a knock-on effect on the consumer. Financial institutions will need to hold more money in reserve, which will make it more difficult to obtain credit, and the credit that is granted will come at a higher cost. Needless to say, the increased cost of credit will dampen consumers’ desire to purchase large-ticket items such as property and motor vehicles. Over the last while prospective home buyers have already been subjected to interest rate hikes, drought-driven food price inflation and rising electricity tariffs. An increased cost of credit would be too much to bear for consumers who are already struggling to deal with the growing cost of living. Another downside to the downgrade is the fact that it will scare away foreign investment, as the country will be perceived as far too risky. Investors will shy away because of policy uncertainty and the government's policy regarding foreign investment in land being discouraged. The higher cost of credit will also slow the building sector as developers will struggle to get the financial backing they require to initiate further projects. If there is an upside to the downgrade, it will be for consumers who have cash: Investors with access to cash will be able to benefit from the predicted price stabilisation, and will have more negotiating power in the market. Your burning questions answered! How will the downgrade affect the average South African homeowner? There’s little doubt that this level of uncertainty is unsettling, and it’s likely to make everybody second guess everything. But South Africans are used to a high level of ‘noise’, and clear thinkers will know that it’s too soon for anybody to know the specific implications of this rating. It’ll take three to six months for the knock-on effects to be felt. Historically, the SA Reserve Bank has utilised an inflation target band of three to six percent to assist in making interest rate decisions, and with time, we will see how inflation reacts to the increased likelihood of the cost of borrowing What steps can homeowners take to soften the blow in the short term? The downgrade will increase the cost of credit as well as that of imported goods, making them more expensive. It will also slow the economy which may impact jobs. Cut down short term debt immediately and consolidate long term debt where possible. Interest rates will increase - consumers with high debt levels will be hit the hardest. How will the downgrade affect those looking to invest in property and how could it impact on first time homeowners? We believe it will impact on first time homeowners purely because they are so reliant on finance, and if the cost of finance is going to increase, they will need to come up with larger deposits. For savvy investors whose decisions aren’t affected by heightened emotions, the state of flux in which we find ourselves can present good investment opportunities. Will the banks will tighten up on the number of bonds it grants to would-be homeowners? It will cost more for banks to hold money, so they will be more stringent with their lending criteria. The stricter lending criteria may result in fewer bonds granted. However It has always been a question of an applicant meeting the affordability criteria. Will interest rates be rising over the course of 2017? None of us has a crystal ball, but should inflation rise due to the increased cost of raising finance, then it would be prudent to expect a chance of rate increases. It would be fair to say that a large number of South Africans are panicking over the recent developments – here is some reassurance: People will always need to buy and sell regardless of the economy. There are always people scaling up, scaling down, people with specific needs, etc. A marginal mitigating factor is that to some degree financial institutions have already made provision and priced in the effects that a downgrade would have on credit costs. Because of this the effect, won't be as radical as some make it out to be but a savvy homeowner would be well advised to reduce their debt levels. In conclusion The ratings downgrade does not sound the immediate end for the property market. The downgrade has in many ways already been priced into the current trading markets We therefore expect the property market to remain stable for the time being and there is no need to panic, as it is “not all doom and gloom”. We expect business as usual for the property market for now however South African consumers need to prepare themselves financially by reducing debt levels and putting away savings.
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February 2021
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