The October Consumer Price Index (CIP) showed a slight acceleration in its year-on-year inflation rate

Posted On Friday, 23 November 2018 08:06 Published by
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Today’s October CPI (Consumer Price Index) showed a slight acceleration in its year-on-year inflation rate, from 4.9% in the previous month to 5.1%.


This remains within the SARB’s (South African Reserve Bank) 3-6% target range, but now being nearer to the higher end of this target range, the speculation regarding tomorrow’s SARB interest rate decision ranges between “hike” and “unchanged” rates, Firstrand expecting a 25 basis point interest rate hike.

The key contributor to this mild acceleration in the CPI inflation rate was the recent sharp rise in domestic fuel prices, brought on by an oil price surge up to early-October. This caused a larger contribution to overall CPI from the Transport CPI


But what do CPI numbers in recent months say about property, or imply for property. Some would say that, given that it has much to do with higher petrol in recent months, homes nearer to major places of employment would become more sought after, in an attempt to lower commuter transport costs. We would doubt this, because these oil and petrol price surges are typically too short-lived to change people’s living and home buying decisions (essentially longer term decisions) significantly. What changes people location decisions over the longer term is the gradually mounting traffic congestion challenge in SA’s major cities, as opposed to short run fuel price spikes.

But a real potential short term implication emanates from a possible interest rate hike, should recent CPI readings lead to this. The weak economy of recent years has already caused real property values (“real” referring to property values adjusted for general inflation, either using the CPI or GDP measures of inflation) to go into decline for some time now, and here we refer to both Residential and Commercial Property. Should the October CPI reading lead to a rate hike, we would expect property demand to remain weak in this economic environment, and for real property values to remain in decline.


The Property Market itself is a key positive contributor in terms of keeping CPI inflation within the 3-6% target range. And here we refer specifically to the Residential Rental part of the Property Market. The Actual Rental and Owner Equivalent Housing Rental CPI Sub-Indices carry a large weighting of 16.84% of the total CPI together. This is almost as big as the Food and Non-Alcoholic Beverages CPI’s weighting of 17.24%, and a weak Residential Rental Market in recent times has contributed to the low CPI/low interest rate cause.

The CPI for Actual Rentals showed inflation of 4.03% (last surveyed in September CPI), having slowed in recent surveys, and the Owner Equivalent Rental CPI an even slower 3.66%.


However, the overall Housing CPI inflation rate remains mildly “troublesome” for the Overall CPI inflation rate, recording an October rate of 5.2% due to ongoing strong inflation in Municipal Rates and Utilities Tariffs, which are components of the Housing CPI, being costs directly related to owning or renting a house.

Municipal Rates and Non-Electricity Utilities Tariffs (“Water and Other Services” CPI) are most troublesome, recording year-on-year inflation of 11.1%. The CPI for Electricity and Other Fuels showed 7.73% year-on-year inflation, also well above overall CPI inflation.

By comparison, the CPI for Home Maintenance is better behaved at 3.1% year-on-year. It is possible that this latter CPI component reflects the Home Maintenance Industry being partly “crowded out” by ongoing sharp cost increases for homeowners emanating from Municipal Rates and Tariffs.

The long term trend of Municipal Rates and Tariffs inflation far outstripping general inflation raises the affordability challenges for tenants and owners, incentivizing a shift to alternative sources of power to Eskom, while also incentivizing better use of property/space.


So finally, perhaps not surprising is that the CPI figures also point to “smaller being better” in terms of home , the Flat Rental and Townhouse Rental CPIs continuing to outperform the  “Houses” CPI, the latter being on average the largest category and the most costly to run. The Flats Rental CPI inflated by 4.7% year-on-year in October, The Townhouses CPI by a similar 4.8%, and the House CPI by a noticeably lesser

Since January 2008, just over a decade, the Flats CPI has inflated cumulatively by 90%, Townhouses by 75.9% and Houses by 62.6%.

Last modified on Friday, 23 November 2018 08:16

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