Interest rate hikes would curb property recovery

According to Statistics SA, May inflation came in at 4.6% year-on-year from 4.2% in April, and also quickened to 0.5% month-on-month from 0.3%. The main drivers of increased inflation came from increasing food and fuel prices.

"We expect consumer price index (CPI) inflation to continue on the upwards trajectory for the remainder of the year, reflective of steep price increases for food and administered prices: electricity, petrol, rates and taxes," said Investec economist, Kgotso Radira.

"Steep wage increases also pose upside risks to the inflation outlook. We maintain our view of a 50 basis point interest rate hike in Q4", Radira added.

Auction Alliance CEO, Rael Levitt said that rising inflation was also likely to see workers sticking to their demands for substantially higher wages, with the National Union of Mineworkers currently seeking increases of between 13.5% and 20% from major gold, coal and platinum producers. Inflation has gradually climbed since hitting a five-year low of 3.2% in September last year.

The South African Reserve Bank raised its inflation forecast and said inflation was likely to pierce the 3-6% target band briefly in the first quarter of 2012, peaking at 6.3%. It said it would not hesitate to act on signs that inflation was consistently above the target band. However, the main repo rate had remained unchanged at 5.5% at three policy meetings so far this year, after 650 basis points of cuts in the last two years, Auction Alliance pointed out.

Levitt asserted that the embattled housing market would be affected by any interest rate hikes. "Although 500 basis points will not kill markets, negative sentiment may cause further deflationary pressure on house prices and shake an already tenuous market".

"In the first and second quarters of 2011, we have seen that any improvement in house prices is still far off, and an increase in borrowing costs will simply prolong the housing recovery and thrust the market into an extended downward cycle."

Levitt maintained that on the commercial property side, many investors, particularly the larger investors and funds, had already discounted interest rate hikes into their purchase costs. "That said, commercial property is a yield based play and when interest rates go up, prices inevitably go down", he added. If one added in the supplementary inflationary costs that commercial landlords were now facing, the news of an interest rate hike was not ideal for the South African commercial property market which had largely been impervious to any downturn.

"We still believe that commercial property investment in SA will remain rock solid through interest rate hikes, but will have an effect on supply, demand and consequently, pricing," Levitt concluded.