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Monday Feb 10, 2014

Hike is 'bad news for the property market'

The decision by the Reserve Bank's Monetary Policy Committee to increase the repo rate by 50 basis points to 5.5 percent effective from January 30 came as a shock to property professionals.

'Although inflationary concerns and global economic impacts remain in the spotlight, the decision to increase the repo rate stable was unexpected, particularly given South Africa's sluggish economic growth,' says Dr Andrew Golding, chief executive of the Pam Golding Property group.

Despite this, he says the residential property market continues to reflect increasingly positive market sentiment and activity, as buyers and sellers have realigned themselves in accordance with current trading conditions and the more exacting bank lending conditions.

Seeff chairman Samuel Seeff says he is shocked and disappointed at the decision to increase interest rates.

'For the first time in five years, we have seen more balance in the housing market, with buoyant demand and increased sales in the major metropolitan areas. This hike is premature and is not related to the excessive demand in the market. It is unlikely to make a real difference other than to cool the economy and will have a negative impact on the current positive sentiment in the housing market.

'We would have liked to see the Reserve Bank attempt to stave off a rate hike in the short term, given that stability is vital right now. This decision is likely to have an unexpected effect on the buyer psyche and is sending the wrong message to the buying public.'

Seeff says sentiment is a vital driver of the economy and property market, and that stability should be encouraged. This announcement could not have come at a more inopportune time, he says.

'The rate hike effectively reverses the 50-point reduction of July 2012 with little real financial impact as it takes bond repayments back to the pre-July 2012 levels. Based on a bond rate of 8.5 percent and a 20- year repayment period, monthly instalments on a bond of about R800 000 would increase by R255 a month from around R6 934 a month to R7 189.

'The real drag on the market remains the tight mortgage lending criteria despite the fact that even with the rate hike, mortgages are still more affordable than a few years ago. Given that about 90 percent of all home buyers require some form of financial assistance, we would once again call for more relaxation of the stringent lending criteria.

'Measures such as a longer repayment period for first time buyers and access to finance for self-employed and small business owners in view of the rise in this sector of the economy could have a real effect,' says Seeff.

Tony Clarke, managing director of the Rawson Property Group, says the Reserve Bank's decision to raise the interest rates for the first time since mid-2009 has come as a shock and bodes negatively for the property market as well as for bond mortgagers.

'In my opinion,' says Clarke, 'it is the Reserve Bank's obligation to bring about economic recovery and to ensure that this recovery is here to stay - and this should happen before increasing interest rates.

'With this new announcement, growth projections will have to be assessed to below the current 2 percent a year.'

He says the decision by Turkey to raise interest rates to protect their currency was an important sentiment for emerging economies. This benefitted the rand, which strengthened to below R11 against the dollar, resulting in all major indices on the JSE being higher shortly after midday on January 29.

'I believe it is premature to push rates up now and see no need for this hike at this time, as there is no threat of rising house prices creating a bubble, and inflation is still at a manageable level.'

Clarke believes the interest rate hike will depress house price growth to an extent where it will fall below inflation, seeing house prices growing at a negative figure in real terms. It will also break the psychological barriers that have led people to take comfort in the fact that interest rates will remain low for the time being.

This new and unexpected revelation may now cause some panic and lead people to believe that this is the first of more rises to come.

Clarke says the rise in the interest rate will also affect recent bond applications as these will now have to be reassessed to make sure borrowers can afford their new homes. In addition, mortgage availability will come under more pressure as borrowing costs will now also go up, which will come as a hard hit to an economy that has struggled to recover from the worst recession in modern history.

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