The Latest on Interest Rates in South Africa

Tito's property crash "cushion"
Realestateweb.co.za reporter
14 August 2008

Interest rates remain on hold, but property market has "yet to bottom", warns bank.

SA Reserve Bank governor Tito Mboweni's announcement on Thursday that the key monetary policy interest rate will be left where it is for now, at 12%, is good news for debt-burdened consumers in general.

But those businesses relying on renewed enthusiasm for consumer spending - particularly in the residential real estate sector - shouldn't break out the Champagne just yet.

Property prices and levels of activity in the residential market are expected to get worse and are unlikely to pick up until the middle part of next year, is the prediction from Absa's senior property analyst Jacques du Toit.

Shortly after Mboweni's announcement, Du Toit issued a note cautioning that the "residential market has yet to bottom".

He said the "severe financial strain" caused by surging inflation, higher interest rates and declining real household disposable income growth would continue to negatively influence the affordability of housing. That in turn means less demand for housing.

The prime interest rate charged to the average bank customer is around 15% - about 5% higher than two years ago and has had the effect of pushing up home loan repayments by more than 35%.

"In real terms house prices are expected to decline for the first time this year since 1999, with the possibility of another real price drop in 2009," said the property expert.

"With economic conditions expected to improve in the second half of next year on the back of declining inflation and interest rates, the residential property market is set to recover shortly afterwards," added Du Toit.

Other market watchers are more optimistic, with the expectation in some quarters that buyers who have been waiting on the sidelines to purchase homes will do so soon, now that it looks like interest rates may have peaked or are close to peaking.

Provided there are no more economic shocks - like even higher oil prices - South Africa can expect interest rates to start ticking down from the end of the year, as has been predicted by top economist Cees Bruggemans of FNB (read Interest rates to fall fast - top economist).

Many consumers will be relieved that their debt repayments have not been increased yet again from unbearable levels

Mboweni warned, though, when he announced his decision to keep the repo rate at 12%, that "we're not out of the woods yet" when it comes to various economic "risks".

He cited the "subdued" housing market as well as a dramatic drop-off in sales in car sales among the reasons for his decision to keep rates where they are.

Herschel Jawitz, chief executive officer of Jawitz Properties, said: "While the decision will obviously not give any relief to homeowners who remain under financial pressure, it will certainly start to stem the tide of falling sentiment.

"Recently, there has been some good news with a drop in the petrol price, a stay on rates, no power outages and the possibility of a settlement in Zimbabwe. This is a far cry from where we were four months ago," he said.

Jawitz noted that, aside from the financial factors like interest rates and consumer prices, sentiment plays a huge part in the residential market.

"We may be nearing the bottom of the property market. It's not certain when the turn will come but at least we will have bottomed out," he added.

Jenny Dugmore, director of Colliers Residential Dugmore, agreed, saying: "This signifies the beginning of an economic turnaround, and will have a significant impact on sentiment."

Jeanne van Jaarsveldt, marketing and finance director of RE/MAX of South Africa, described the interest rate decision as the "first, but small, step toward a property market recovery."

He expects "little effect" on property sales but "does believe it will "lift some of the clouds overhanging property sales and introduce much needed rebuilding of confidence in property ownership, especially among investors".

"The coupling of still too high interest rates and tight credit restrictions will continue to hamstring first time buyers," said Van Jaarsveldt.

Dr Andrew Golding, chief executive officer of the Pam Golding Property Group, said: "From a residential property market perspective it is evident that while the National Credit Act has bedded down in terms of curbing credit, it takes quite some length of time for the stringent measures of higher interest rates to filter through and take effect."

It is likely, added Golding, "that we shall still be experiencing these (effects) for some time to come".

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