South Africans losing their homes

The South African Reserve Bank’s (SARB) refusal to cut interest rates at a higher rate is resulting in an increasing number of South Africans being unable to pay their loans, with some losing their homes.

This was explained by Renier Kriek, managing director of home financier Sentinel Homes, who described the Reserve Bank’s hesitation to take decisive action in reducing the interest rate as unethical and unjustifiable.

At its last MPC meeting in September, the Reserve Bank cut rates for the first time in years. However, the committee only cut rates by 25 basis points, which disappointed many South Africans who were looking for more relief.

The SARB’s Monetary Policy Committee (MPC) meeting on 21 November 2024 resulted in another 25 basis point cut.

Further interest rate cuts have been expected for months, but in light of the US Federal Reserve’s outlook for higher interest rates for a longer time, interest rates in South Africa may also stay higher for longer.

According to Kriek, the Reserve Bank’s failure to announce a rate cut of at least 50 basis points means its decision-makers should take ethical responsibility for the undue hardship on South Africans.

The MPC keeps reminding South Africans that it is bound to its inflation-targeting mandate, focused exclusively on inflation and nothing else.

It determines compliance with that mandate by using its so-called “model”, which, to the public, is a black box completely opaque to outside scrutiny.

Such statistical models always approximate and vastly simplify the economy, which is an immensely complex system, especially regarding inflation and its interplay with other economic variables.

“No matter which factors or variables the bank’s econometricians employ, the model must always include largely subjective judgement calls,” Kriek said.

In addition, inflation targeting is a relatively new paradigm, first introduced in New Zealand in 1989 and implemented by South Africa in 2000.

He explained that it’s now assumed to be gospel even though the world’s central banks do not universally adopt it.

Kriek noted that even if one takes the MPC at its word, inflation has been dropping steadily and is below pre-pandemic levels.

This is well below the midpoint of the SARB’s target range of 3% to 6%. Therefore, if the committee does indeed follow only the inflation-targeting mandate to the exclusion of all other considerations, the SARB’s MPC should aggressively cut the interest rate.

Kriek explained that if inflation targeting employs an increased interest rate to dampen spending and thereby bring price increases down, then it has already achieved this outcome.

Yet, reducing the rate by only 25 basis points means the SARB has left South Africans facing continued and avoidable economic challenges.

He explained that, in the greater context, people are losing their homes and are under immense financial pressure, with food prices having increased by 50% over the last four years.

Poorer South Africans cannot afford to feed themselves or their children properly, and they are facing food insecurity and malnourishment at alarming rates.

Kriek noted that this is because jobs are not being created, and the GDP is not growing as it would have if the real interest rate was lower.

Despite low demand in this segment, the property industry is seeing growth among those in the top 30% of South African income earners.

This is because banks are flooding that market with relatively easy money to offset the growing rate of home loan defaults.

The National Credit Regulator’s previous Consumer Credit Market Report indicated that 92 to 93% of home loans were typically not in arrears. That means 7% to 8% were defaulting.

However, recent data from the second quarter of 2024 reveals that only 87.8% of home loans are paid up to date.

Therefore, partial or full non-payment has increased to 12.2%. That is an increase of more than 50% in homeowners missing payments.

“The resulting loss of homes and other properties can be directly attributed to the high interest rate,” Kriek said.

“We must realise that the high interest rate does not lead only to direct pressure, in the form of a high instalment for the individual homeowners, but also has indirect effects.”

“The opportunity cost of maintaining an overly cautious monetary policy is having a significant impact on our economy.”

South Africans are under assault from factors outside their control, such as foreign conflicts and economic disruptions that impact both import and export costs and opportunities, with the country’s commodity exports being especially hard hit.

Kriek also said there’s uncertainty about how the incoming Trump administration might affect inflation in Africa.

Therefore, the country has a small window of opportunity presented by the current low inflation, where a reduced interest rate could stimulate the economy and bring some relief to its citizens.

This could come in economic growth, fixed capital formation, and job creation to ease our dizzying unemployment and economic hardship.

The MPC is not bound to its regular announcements but can make extraordinary adjustments to the interest rate as it did during Covid-19, should the fears of upward inflation pressure prove warranted.

This means it can immediately reduce the interest rate and, if any risks suggested by the model eventuate, simply increase them again when and if necessary.

“The SARB’s cautious and conservative approach to monetary policy is no longer beneficial to anyone, and it’s time to consider an alternative path forward,” Kriek said.

“Why continue giving the patient bitter medicine if the illness is healed? The possibility of a future illness is not a good enough reason.”