This is an unprecedented time and it calls for the South African Reserve Bank to step in with a bold rate cut of as much as up to two percent (200 basis points) as an immediate measure to stimulate demand in the economy, he says.
While pleased with the one percent (100 basis points) cut to accommodate the lockdown period, Seeff says that it has now been extended with seemingly no end in sight. Reserve Bank Governor, Lesetja Kganyago’s mid-April statement that a further five cuts of 25 basis points between Q2 and Q1/2021 are planned, is simply not enough and will take too long.
As the Covid-19 Pandemic has unfolded, we have seen central banks globally respond with aggressive rate cuts and fiscal intervention. A meaningful cut that can reduce the prime interest rate to say around 5.75% and ideally below 5% before year end is needed to stimulate demand and activity across all sectors of the economy and property market in particular.
Seeff says further that the oil price has since plummeted and inflation, one of the biggest impacts on the interest rate, is contained with Stats SA announcing in late April that the CPI had dipped to 4,1% in March, down from the anticipated 4,6% (as at February). It is likely to come down further and could possibly dip below the 3% mark. The low fuel price is also likely to help contain inflation for some months to come.
While the Rand has expectedly declined due to the Moody’s and S&P downgrades and the Covid-19-induced economic outlook, a Bloomberg editorial of the 10th May makes the case for a rebound on the back of an emerging market recovery.
The SA economy has just about ground a halt. It was already in recession before going into lockdown and we have seen most sectors plummet in April with worse is to come for May. New car sales which is usually at around 40,000 per month, fell to just 500. Real estate volumes, which was already trading at about 30% below normal market conditions before lockdown, fell by at least 70% in April and will worsen in May, says Seeff further.
There is a great deal of uncertainty in the market. Consumers and businesses are under enormous strain. A meaningful cut in the interest rate will alleviate the financial pressure on households and businesses and on the other hand, bring down borrowing costs to stimulate demand and economic activity.
Seeff says that with the market in a battle to regain stability, a sharp cut in the repro rate will not only go a long way to stimulate a recovery, it will free up much-needed cash to push demand and upward growth for the economy.
As the lockdown is eased, a drastic rate cut will be a lifeline for households and businesses. It will help keep more people in jobs, enable more SMME businesses to keep going and enable people to hold onto their homes and financed assets. More disposable income will stimulate retail and other sectors of the market including property.
The economic benefits of a moving property market are significant. An impact study done for REBOSA by Associate Professor François Viruly from the Urban Real Estate Research Unit of the University of Cape Town shows that it contributes 6% of GDP and estate agency commission alone is an estimated R9,3 billion and has a multiplier effect of 1.94, thus an economic impact of about R18 billion.
Real estate supports a total value chain of about R23,6bn per annum (agents’ commission, attorneys’ fees, financial services, home improvements, removal companies and home inspections) and generates government revenue across the different tiers of up to R16bn (per the national budget for 2019/2020) plus additional revenue such as CGT, Deeds Office fees and so on.