Now Is the Time to Save

Few were surprised that the Reserve Bank decided to leave the repo rate unchanged at 5% - as it has since last year – due to less than stellar local economic growth. John Loos, Household and Property Sector Strategist at FNB, points out that the Bank has actually lowered its 2013 GDP growth forecast from 2.4% to 2.0 with growth only expected to accelerate again in 2015.

Costs and Savings (or the lack thereof)

According to an article published on Fin24, 80% of consumers’ disposable income is going towards debt and Sasi (South African Savings Institute) CEO Elizabeth Lwanga-Nanziri says that they’re finding more and more young people spending their entire monthly salaries. She told Fin24 that these youngsters “think that 10 to 15 years is too far off in the future to plan for” and that many also simply don’t know how to save. 

It’s not only the young who are struggling though. Writing for Fin24, Carin Smith points out that; “these over-indebted young people are part of the ranks of the more than 50% South African consumers battling to pay their debt”.

Add Taxes to the Mix

Speaking to the Financial Mail, First National Bank household and property sector strategist, John Loos, explained that household income and wealth taxes rose to 13.6% last year, its highest peak since 1999. He further points out that households’ ‘combined payment bill’ has increased to 15.1% (up from 11.8% in 2003) when adding net interest costs to the mix.

The Outlook for the Property Market

Home owners nationwide are all feeling the brunt of increased municipal rates (10% year on year tariff hikes for electricity and 9.2% for water and other services) and at least one more petrol increase scheduled for this year.

Loos warns that the implications of the decision to keep the repo rate at 5% will likely be a “further slowing in real household disposable income, as the effect of prior rate cuts wears thin, a more-or-less sideways movement in the household debt-to-disposable income ratio, and no further meaningful improvement in household debt servicing (repayment) performance.”

Jan le Roux, CEO of Leapfrog Property Group, concurs with Loos’ assessment and believes that the best option for home owners now is to save as much as possible; “The economic situation, both domestic and international, is far from stable and the best defence against future hardship is to cut down on debt”.  

It’s also important to bear in mind that “it’s doubly beneficial for a home owner with a mortgage to pay more towards that mortgage; thereby saving 8.5% interest. This is the same as receiving “8.5% interest” except that it is tax free”, says le Roux. He goes on to explain that because doing this means that a person effectively pays less interest, it is the equivalent of getting the benefit of that 8.5%, making it “the best savings plan on earth”.