Consumers should not make harsh decisions like selling their property, but rather revise their budgets and weather the storm.

“Look for cheaper options on things such as insurance products. Competing companies are likely to give you a better deal to acquire your business, especially in the current economic climate,” says Deon Lessing.

He quotes Finance Minister Trevor Manuel in saying that the inflation target band will remain unchanged at 3% to 6%. But this month the measure of inflation will change from the current CPIX inflation to headline CPI. This should bring about a lower inflation rate.

“Mortgage interest rates will be replaced with owner’s equivalent rent. Mortgage interest rate changes directly affect the measure of housing costs, which is why they were previously excluded from the target measure of inflation. The new measure will enable the cost of housing to be represented in the target measure,” says Deon Lessing.

“Inflation on necessities such as food and petrol are inescapable, which has repercussions on consumer spending. It’s simple: rising inflation erodes household spending. Even though food and petrol prices are now dropping, the weaker Rand has, to some extent, cancelled the effects on this.”

The current CPIX is based on expenditure patterns in 2000, whereas the headline CPI will be measured on the household income and expenditure survey of 2005/2006. Spending patterns have dramatically changed. Consumers have been hit with a cumulative 500 basis point interest rate hike since 2006, which lead to consumer spending declining. Soaring inflation rates reached a record high of 13,6% year-on-year (y/y) in August, and this, coupled with slowing income rates, has left consumers tightening their belts.

“Although we may be through the eye of the storm, we are still in for tough times ahead. It is important not to panic as fundamentally the South African market is still strong. We will not see growth in 2009 as we did between 2004 and 2007, but we are still far from recession.”

Manual advised that consumer inflation had been outside the target band for the last 15 months and inflation targeting will remain the anchor for the monetary policy.
Although navigating through this tough economic environment will be a challenge, the government will continue to expand and improve public services, investing in the infrastructure required for growth.

“Although the first half of next year may still be affected by past interest rate hikes, the new measure should bring the inflation rate back towards the target, which will bring about interest rate cuts. The sentiment is that interest is currently returning to the property market, but rate cuts will accelerate the market recovery period. South African consumers are better off than those in the US, who have a debt-to-income ratio of over 130% due to lax credit regulation. The introduction of the National Credit Act (NCA) has helped the South African consumer prepare for the current global crisis,” Lessing concludes.

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Consumer Protection Act introduces some protection for consumers at forced sales

The Consumer Protection Act (CPA) has introduced some protection for indebted consumers who are forced to sell their properties to pay off their debts – a process known as sales in execution.

“Under the new legislation ‘auction’ includes a sale in execution of or pursuant to a court order,” says Jennifer Smit, a director at Werksmans Attorneys.

“Thousands of residential and commercial properties that are auctioned off will now be affected by the CPA. When consumers can’t repay their debts, their creditors are entitled to go to court and obtain judgments to attach their assets. A sheriff of the court is the only person designated to obtain a warrant and attach, as well as sell, the debtor’s movable property, such as cars, furniture, shares and cash. If the funds raised are insufficient to satisfy the debt in full, any immovable property, such as a house, can be attached.”

She says the CPA does introduce some positive standard requirements that must be met at all auctions, such as auctioneers providing paddles to bidders and ensuring that those attending comply with the Financial Intelligence Centre Act (FICA). It also outlines other requirements, such as notice being given in advance that a sale by auction is subject to a reserve or upset price, and prescribes the way an auction should be conducted. In addition, it requires records of the property placed on auction to be maintained.

“But the CPA appears to apply to auctions conducted in the normal course of business and is clearly drafted with auction houses in mind,” says Smit.

She says sales in execution are undertaken by sheriffs of the court, many of whom simply do not have the resources to comply with the new act.

Smit says that sheriffs are not always trained to conduct auctions professionally, nor do they have the necessary technology and systems in place to manage an auction effectively. For example, one of the few existing regulatory requirements is that successful bidders at sales in execution auctions must pay 10 percent of the price of the item in cash – and on properties running into the millions, this often equates to suitcases filled with hundreds of thousands of rand.

“The whole system is rudimentary. There is a lack of clarity in the CPA concerning whether the auctioneer has any duties concerning the quality of the goods on sale. It’s also not clear how the act perceives the role of auctioneers – whether as agents or sellers.”

But she says the legislation does try to address some of the weaknesses in the current law, including preventing price fixing and collusion at auctions. For example, the CPA prevents the owner or auctioneer from bidding or employing any person to bid at the sale. It also enables consumers to approach a court to declare the transaction void, if the regulations are not adhered to.

“Because sales in execution are effectively forced sales it’s in the interests of the debtor and the creditor that the highest possible sales price is reached,” says Smit. “Price collusion between seasoned auction attendants keeps prices artificially low, and the CPA regulations do not appear to address this and other issues contextual to sales in execution.”

Smit says sheriffs are limited to claiming a maximum commission of R8 750 (excluding VAT and dependent on the ultimate sale price realised) for their auction services in respect of immovable property, irrespective of the value realised at the auction. The allowable commissions for movable assets are even less. This is a disincentive which the CPA does not take into account or address.

“The CPA introduces positive measures for consumers, but sheriffs of the court will need to find ways to cope with and afford the increased administrative burden placed on them,” says Smit.

“The existing difficulties with sales in execution have not been addressed by the regulations, all they have served to do is introduce new obstacles for the sheriff to contend with.

“Although the CPA is a step in the right direction for consumers generally, the legislation governing the sales in execution process should be amended to really protect the interests of all parties, not just consumers. The execution/forced sale process should also allow parties with an interest in the final sale price realised to appoint auctioneers of their choice who could use their expertise to ensure that debtors’ most valuable assets are not sold for less than they are worth.”

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