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Monday Feb 10, 2014

Interest rate hike sobers property market

In a move that surprised many the Reserve Bank's monetary policy committee increased the interest rate by half a percentage point to 5.5 percent at its first meeting this year.

The prime lending rate has also been increased, to 9 percent, up from 8.5 percent. Most market analysts were expecting an increase only next year, but the weakened rand seems to have pressured the committee into making the move.

Inflation also played a leading role in the decision, with the Reserve Bank Governor, Gill Marcus, saying 'the primary responsibility of the bank is to keep inflation under control and ensure that inflation expectations remain well anchored'.

John Loos, household and property sector strategist at FNB, believes the increase could negatively affect the residential property market in the short term.

This is because it will contain the household sector's debt- to- disposable income ratio, while raising the level of bad debts slightly.

However, Loos says one interest rate hike is unlikely to have a big impact.

He also says that all bets are off regarding any noticeable rise in house price growth from recent levels. He believes single-digit price growth is expected to remain a characteristic this year.

MSP Developments chief executive Riaan Roos says he expected the interest rate to go up by 50 basis points in the next quarter of this year, given that this is an election year.

'It was a bit of a surprise to see the Reserve Bank increasing the repo rate, but this is most probably the most responsible decision, given the weakening of the rand.

'In the long term it will also have a more positive effect on the economy and less of an impact on the market to have the interest rate going up gradually rather than a higher jump in the second quarter of this year.

'We expect the interest rate to increase by another 50 basis points by the end of the year, and then for it to gradually go down again next year.'
Bruce Swain, managing director of the Leapfrog Property Group, says although the group didn't expect a change in the interest rate so soon, its message to home owners remains the same.

He says they need to tighten their belts as the ratio of household debt to disposable ncome remains high and the interest rate is likely to go up again. Homeowners need to pay any spare funds into their bonds.

Swain also urges home owners and buyers to remember that it's best to take a long-term perspective when dealing with property.

'Over the long term house prices have continually increased in value and, regardless of short-term hurdles, property remains the best investment opportunity for the average South African.'

Adrian Goslett, chief executive of RE/MAX of Southern Africa, says although the interest rate increase could place slightly more pressure on home owners and potential buyers, it is highly unlikely that it will have any real effect on the market's recovery.

He says that, despite the slight hike, the prime lending rate remains favourable to prospective property buyers and consumers.

'Consumers should take advantage of the interest rate level, as it is at one of its lowest points in the past 50 or more years. They should pay any extra money into their outstanding debts or pay down their bonds if they own property. This will help them to cope with the increasing cost of living, and will substantially reduce the term of the bond.'

Mike Greeff, chief executive of Greeff Properties, an affiliate of Christie's International Real Estate, says although the announcement by Marcus was unexpected, it is informed by sound fiscal practice.

'The 50 basis points increase is intended to try to stem inflation, which is close to the (maximum) 6 percent (of the targeted range). It is in danger of crashing through that ceiling based on a weak rand and imminent petrol hikes, which will have a ripple effect on all services and goods.

'At best, it is hoped the rise in the interest rate will help to curb inflation. I believe the lower- to mid-priced property market is likely to feel the effects most, given the reliance on home loans in this sector.

'It's this price range that has shown the most significant signs of healthy growth, to the extent of stock shortages and, in some areas, indications of a seller's market.

'Given the forecast of more rates increases to come, wouldbe buyers should not extend themselves beyond what they can afford and sellers need to be careful of overoptimistic pricing.

'On a positive note, the weak rand and the increase in the interest rate is inviting for foreign investors. With Cape Town being the 2014 Design Capital, we're expecting a lot of visitors, and that bodes well for property.'

The decision to raise the interest rate by 50 basis points will undoubtedly put a damper on the property market recovery, says Shaun Rademeyer, chief executive of BetterBond Home Loans. However, the effect is not expected to be severe or lasting, unless more rates hikes follow in quick succession.

'The increase in the repo rate from 5 percent to 5.5 percent will take the banks' prime lending rate - and the mortgage rate - from 8.5 percent to 9 percent, which is where we were before the last post-recession rate decrease, in July 2012.

'There has been a huge increase in the demand for property since then, although consumers have had to contend with steep fuel and electricity price hikes and other significant cost-of-living increases.'

There are many reasons for this, including a growing population, fairly low growth in home prices, and the banks' increased inclination to provide long-term rather than unsecured loans, Rademeyer says.

'But the major reason is that many consumers have worked hard since 2009 to clean up their credit records, reduce their debt loads, and not take on new credit.

'This is clearly evident in the latest statistics, which show that the rate of new household credit creation has been dropping since November 2012, when it reached 10.4 percent, and was just 5.5 percent in December, compared with 5.9 percent the month before.

'What is more, the rate of household credit growth is expected to remain below the rate of growth in disposable income, which is at 7 percent.

'In short, consumers are in much better financial shape and much more able to deal with moderate rate increases than they were at the start of the recession five years ago.'

Rademeyer says the rate increase means that the minimum monthly repayment for a homeowner with a 20-year bond of R900 000, taken at 8.5 percent, will rise by almost R300, from R7 810 to R8 098.

'But it must also be said that a mortgage rate of 9 percent is extremely low by South African standards.

'Bonds granted at prime rate have in any case been very rare in the past five years, with most being granted at 1 or 2 percentage points above prime.'

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