Low inflation offers scope for property investment

Isaac Pinielo | Thursday March 26, 2015 17:31

The Central Bank last month reduced the bank rate by a percentage point to a 25 year low of 6.5 percent as inflation also fell to a four decade year low of 2.8 percent in February from 3.6 percent in January.

The slowing down of price increases, which is anchored by the drop in fuel prices, together with the reduced cost of borrowing has worked to improve disposable incomes for Batswana.

According to president of the Real Estate Institute of Botswana (REIB), Modiredi Maruping, a more affordable life actually means people can access extra funds to invest in property.

“When the economy is in difficulties people do not have sufficient funds to spare to invest in property. Tighter lending rules mean less people buying property and they will remain renting,” he said.

Maruping also noted that any resultant increase in demand will edge rentals up and that there is also a business opportunity for those who can afford to invest in that space and provide rented accommodation. He said in the long run an increase in supply would stabilise rentals.

He added that inflation describes a sustained increase in prices in percentage terms, noting that if building material prices are stable the price of the end product will also be stable.

“Lower inflation eases the pressure on prices to rise. Botswana’s residential property market remains strong, amid healthy economic growth and political stability,” he said.

He, however, noted that the property prices do not fall that easily in Gaborone even with low inflation and a drop in bank rate.

He pointed out that the situation just reduces the cost of borrowing money to buy real estate.

Economic analyst, Garry Juma said lower rate of inflation is desirable in any economy for planning purposes by all economic agents.

He said the lower levels of inflation imply that prices are rising at a much slower space, adding that this will be a relief to consumers whose disposable incomes has been shrinking over the years.

“Low inflation means lower to stable price movements and lower interest rates which will expose households and business to lower cost of funds,” he said.

He, however, indicated that lower interest rate discourages savings in banks, as deposit rates will also be unattractive.

He added that lower inflation levels have also seen the Central Bank adopting a much accommodative monetary policy and that this has seen the bank rate being reduced to 6.5 percent, providing much relief to households and business that had been exposed to high cost of funds. “It should however, be noted that core inflation, which is another important measure of inflation, is still above the Central Bank’s objective range and is sitting in at 3.2 percent,” said Juma.

Property market expert, Sethebe Manake said the drop of inflation in February is a generally exciting thing for the Botswana market where households have been between a rock and a hard place.

She argued that although lower inflation coupled with the drop in the bank rate should essentially mean that living standards in the country are cheaper and thus life is better, this might not the case for real estate.