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Wednesday Nov 16, 2011

18-month hiatus expected before property gains

Last week's decision by the Reserve Bank to leave the interest rate unchanged at 9 percent should not give consumers an excuse to go on a spending spree, warn the experts.

John Loos, property strategist at FNB Home Loans, cautioned consumers and said although the interest rate remained unchanged, it would be wise for households to make provision in their financial planning for future hikes.

He said although there was no certainty around how much to make provision for, the past two hikes saw the interest rate increase by four and five percentage points respectively.

"It doesn't necessarily mean not making one's desired purchases, but may mean lowering one's aspirations in terms of the home or car that one may have been considering purchasing, if there is no 'buffer'."

In an earlier report, Paul Barnard, executive financial planner at Consolidated Financial Planning, warned consumers that although unchanged interest rates made home and car loans relatively cheap, credit users should not overextend themselves.

He advised consumers to always budget for an interest rate 2 percent higher than the current rate and to increase installments accordingly. Barnard gave the example of a R1 million bond paid over 20 years at 9 percent. This would require a monthly installment of R8 997, meaning the total interest a consumer would have paid in the end is R1.2m.

"If you budget for an interest rate of 11 percent instead of 9 percent, your installment would be R10 322. If interest rates rise to 11 percent you will be able to afford the installment because you have budgeted for it."

He added that should the interest rates not rise and a consumer pays R10 322 instead of R8 997, the bond would be paid off in 14 years.

"If you adopt that approach and interest rates do not rise, then you will settle your debt early and save on costs of credit. If interest rates do rise, then you can easily absorb the increase because you are used to paying more than the minimum installment.

"Speak to your financial planner, who will advise you how to budget for your debt repayments and include a buffer of 2 percent."

Samuel Seeff, chairman of Seeff properties, said in view of the continued global and domestic economic pressure and the upward inflationary trend driven by fuel and utility hikes, a conservative approach would benefit the economy in the medium to long term.

He cautioned that while the low interest rate improved affordability for bond holders it should not be a signal for consumers to spend. They should rather focus on bringing down their household debt levels.

Seeff said he believed the introduction of a formalised policy that enabled first-time buyers to acquire 100 percent bonds was a good idea.

"I believe that prices and sales volumes will ebb along for the next 18 months and that only once there is a significant pick-up of the macro economy, underpinned by employment growth, are we likely to see any real uptick in the real estate market."

However, the CEO of RE/MAX of Southern Africa, Adrian Goslett, was more optimistic.

He said RE/MAX believed the property market in South Africa had performed remarkably well compared to other markets.

Goslett said RE/MAX had found South African consumers felt better about the future of the local real estate market following improved winter sales.

"South Africa seems set to see a full recovery in the market, far quicker than our international counterparts. South Africa's inclusion into Brics (Brazil, Russia, India, China and South Africa) will also have a positive impact on the local market as this will attract investment and fuel in the economy and real estate market alike."

Cape Argus


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