The Monetary Policy Committee’s decision on Thursday to keep the repo rate at 5.5% and prime lending at 9% comes as no real surprise and offers a continued respite to debt burdened homeowners.

This was widely anticipated and is welcome, said Dr Andrew Golding, CE of the Pam Golding Property group, particularly against a backdrop of rising oil and food prices coupled with increasing electricity tariffs.

“Consumer spend generally remains cautious as a result of ongoing concerns regarding household debt.

“And amid market speculation regarding an end to the current cycle of lower interest rates, it is hoped that interest rates will remain stable at least for the remainder of this year in order to stimulate further economic growth, bearing in mind that job creation remains a key focus,” said Golding.

He said that from a residential property perspective Pam Golding Properties continues to see a gradual, albeit modest improvement in sales volumes and in house prices. “It should be borne in mind that we are still seeing the effects of the latter part of last year’s reduction in interest rates permeate through the marketplace, helping sustain residential sales across most price sectors.

“However, although relaxed to some extent, strict bank lending criteria continue to keep a rein on any significant recovery in the housing market,” added Golding.

He said that while it’s true that interest rates are at a historical low, first-time buyers entering the market still face affordability issues. This is “due to the higher municipal rates and increased electricity costs, among other costs inherent in the purchase and upkeep of a home, and this is exacerbated by restricted access to finance.”

“On a positive note, what we are noticing is that those sellers who are receptive to pricing their homes at realistic, market-related prices are reaping the benefits and achieving sales,” said Golding.

He said that for investors who have access to finance or with high liquidity, there are still good buys to be had, as property prices in the main have remained relatively constant over the past year or so. “Having said that, there are many areas or locations where properties continue to achieve sound growth in value, and will continue to do so, making the case for investment in property as valid as ever”.

While most remain cautiously optimistic about continued economic recovery, said Adrian Goslett, CEO RE/MAX of Southern Africa, there are definite signs of improvement. “Aside from the interest rate remaining stable, The South African Chamber of Commerce and Industry’s Business Confidence Index for January 2011, which is at 87.4, indicates a vast improvement from January 2009 (82.4) and 2010 (81.2).”

It is anticipated that 2011 will be a fairly flat year for the property market, said Goslett, as debt-to-income ratios are still at a relatively high level and as distressed homeowners continue to make use of the various bank programmes to assist them in selling property they can no longer afford.

“As there is still limited access to finance, rental markets are expected to peak while qualified buyers will be able to make the most of the property investment opportunities that are currently there for the taking, a situation which certainly won’t last forever as interest rate hikes are expected later in the year,” said Goslett.

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The decision by the South African Reserve Bank (SARB) to cut interest rates by 0,5% shows that the housing market has returned to a weakening trend and this would seem to set the scene for a relatively good buying period.

So says John Loos, property economist at FNB, who adds that despite the repo rate dropping to 6% and the prime rate falling to single digits from 10% to 9,5% for the first time in three decades, home owners should still not be lulled into a false sense of security.

“Potential buyers should be aware that this does not mean that there are no housing-related cost increases. Municipal rates and utilities tariffs are set to be a key source of housing-related cost increase in the next few years, as utilities look to find the funding for much-needed infrastructure. Eskom is presently the biggest driver of home-related cost increases.

“In addition, applicable especially to Gauteng, looming large is a major increase in transport costs for many people, as many of the province’s freeways are set to become toll roads.

“What the SARB is currently giving, other authorities are taking back.”

He says one would therefore be well-advised to buy a home well within one’s means, making provision for the big housing-related cost increases, and rising transport costs mean special consideration for location relative to one’s commuting destination.

Jacques du Toit, property strategist at Absa, said based on the latest cut in interest rates, mortgage repayments will now be about 31% lower compared with late 2008, when the mortgage rate was at a level of 15,5%.

“The cumulative 600 basis points worth of interest rate cuts since December 2008 have caused the cost of servicing household debt, including mortgage debt, to drop significantly. However, many households are still struggling with a high debt burden, with the ratio of household debt to disposable income above the level of 78%. The forecast is for the debt ratio to remain around this level towards the end of the year and into 2011.”

According to Absa’s calculations, house price growth slowed down to a nominal 7,1% y/y in August 2010 on the back of the base effect of a strong recovery in price growth in the second half of last year. “House price growth is expected to taper off further towards the end of the year, and to remain in single digits in 2011. The lower interest rates, however, will support the property market, but are not seen as a major stimulating factor.

“After bottoming in late 2009, year-on-year (y/y) growth in household mortgage advances remained relatively low in the first seven months of this year, reflecting conditions with regard to household finances, the extent of consumer confidence, and the effect of the National Credit Act (NCA). Household mortgage advances will be supported by the low interest rates, but are forecast to continue to record single-digit y/y growth in the rest of 2010.”

Loos said the short-term positive impact of the latest cut will be too small to change the weakening trend in the property market. “This is because the negative factors slowing the market at present appear significantly more powerful. These are twofold, i.e. a slowing economy as well as the wearing off of the huge interest rate stimulus emanating from 5 percentage points worth of rate cuts in the period December 2008 to August 2009.

“The wearing off of such a major stimulus can hardly be offset by today’s small interest rate reduction. Therefore, we expect the ‘mini-cycle’ slowdown in the residential market to continue, with y/y house price inflation (at 7,2% in August) to continue to decline steadily towards year-end.”

Dr Andrew Golding, CE of the Pam Golding Property group, says this is good news for existing home owners and for prospective home buyers. “Although the residential property market has shown some increased activity in terms of sales volumes (ie units sold), the ongoing constrained economic conditions and limited access to bond finance, coupled with the significantly increased electricity and rates tariffs, is still hampering significant recovery in the housing sector.

“With the arrival of spring, there is usually a natural seasonal increase in activity in the property market and there is every expectation that this season will be no different, particularly given the fact that the market experienced an ‘unnatural’ slowdown during the six weeks of the Soccer World Cup and appears to be catching up.”

Golding says some signs of green shoots of recovery are there, albeit to at least the market activity levels that were present in the run-up to the World Cup. “These activity levels are in themselves 30% up on last year (2009). A number of factors are responsible for this recovery and include improving market sentiment, i.e. a sense that the market might have reached the bottom; improving bank lending; greater realism amongst sellers regarding the current market value of their properties; and an increase in the number of buyers looking to transact.

“Show house attendances are generally on the increase – in line with expected trends for this time of the year. We have also seen the slow but steady re-emergence of buy-to-let investors in all the major metropolitan areas of the country. International enquiries, while generally slower than in previous years, have also begun to increase. In respect of the development market, there are growing indicators that the larger developers are poised to begin re-entering the market.

“As far as house values are concerned, our view is that for the remainder of this calendar year, prices will remain relatively steady with house price growth expected to be somewhere between 0% and 5%.

“From the perspective of price sectors most in demand, there is very little change to the status quo which has been evident for some time, namely with the market from R800k to R1,5m being the most active. However, with properly qualified buyers and realistic sellers, properties are moving in all price segments from the affordable housing segment right through to the ‘über prime’ market.”

Samuel Seeff, Chairman of Seeff Property Services, says although the rate cut was much-needed and expected, a bolder approach would have been welcome. “We would have liked to have seen a cut of 0,75% or even 1% as a boost to the economy.

“However, this issue is not as significant to the market as the banks’ approach to lending. If we are going to have any sort of kick-start to the property market, it will come about as a result of banks reducing their criteria in terms of approving loans.

“The interest rate is not the factor that is holding the market back right now – it is the banks. We are not even talking about 100% loans-to-value bonds being rejected – there are people prepared to put in equity, and the banks are still not approving them. If they could start to relax on their criteria this would begin getting the market going, and would be of benefit to all.

“I am not asking for banks to give 100% loans. I think their focus on ensuring that the buyer/investor puts some money into the transaction is a good one. However, we have seen cases where the buyer is asking for no more than 50% and is putting in as much as R1m or R1,5m and looking for another R1-1,5m, and this is still not approved.

“It is this type of thinking that holds the market back. There is sufficient buyer interest, enough attendance at showhouses and plenty of buyer viewing, but the offers to purchase which are not being approved are holding back the market at the moment.”

Jan Davel, the new MD of the RealNet group, says the minimum monthly repayment on a 20-year home loan of R500k will now decrease by R164.

“This will obviously be of some help to existing homeowners, but the real benefit of the Reserve Bank’s decision this week is that it will make it easier for potential homebuyers to qualify for loans. For example, the monthly earnings required to qualify for a R500k loan at 9,5% will be some R15,500, compared to the R16,100 required at the previous prime rate of 10%.”

And prospective buyers, he says, will be further assisted by the fact that the rate cuts will shrink their existing monthly expenditure, which in terms of the NCA must also be assessed before a loan can be granted. “Repayments on cars, furniture, clothes and credit cards will all decrease.

“What is more, with a good credit record and a deposit, some borrowers will even be able to secure loans at below prime rate, making it even more affordable for them to buy property.”

However, he does not expect the rate cuts to prompt a spate of new borrowing or an immediate spike in residential sales, but rather to help the property market maintain its current momentum towards full recovery.

“For one thing, there is quite a shortage of affordable, entry-level stock at this stage, because developers are bringing very few new small homes to the market and the average price of existing small homes has climbed steeply in the past year.

“And on the other hand, the middle-market upgrading that might have been boosted by the rate cuts will be quite constrained, we believe, by the effect on household budgets of higher municipal rates and service charges. Most existing homeowners will probably rather take this as an opportunity to reduce debt – but that will benefit the property market in the longer-term.” – Eugene Brink

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