26 March 2008
Inflation: It's Not Looking Good
Consumer price inflation just pierced the 9% barrier (to 9.4% up from 8.8% in January!). With the tarriff increases that Eskom wants we can expect double digits before the end of the year. The Reserve Bank is not going to have much choice, I expect a rate hike in April with possibly more on the way.
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Oil at record prices so packaging and transport will be much more expensive - China has similar inflation and a buyer friend says her import prices are up 20% from last year - factor in another 15% with the Rand dropping and we are going to see a huge increase in import prices - food is rocketing so workers will be pushing for larger than inflation pay increases - factor all this together and inflation is going to rocket - the bad news for "house investors" is that their bond payments are also going to rocket. The good news is that if we get inflation of 15 % for the next 4 years then we will only need about a 5% house annual house price drop for each of these years to get us down to the 64% real price decline needed to bring the housing bubble under control.
I have just done some back of the envelope calculations at the difference between renting a R2m house for 4 years at an average R7000 a month rent and buying, whilst assuming the above scenario of 18% bond rates and a 20% decline in house prices over 4 years ( plus a 5% estate agent commission to sell after that 4 years) - I calculate that if you buy it will cost you a loss of R37000 more a month to live in that house than to rent it - ie rent monthly loss over 4 years is R7000 per month - buying monthly losses over 4 years are R44000 per month. In other words it would be total madness to even consider buying.
I didn't include rates and repairs so increase the buyers costs to R48000 a month - ie R41000 more a month than the renter pays ... no wonder the agents say buyers are thin on the ground - it is a mystery why anyone would be buying a house at present - it is pretty much financial suicide !
Thanks for the calculations CJ.
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