THE MIDDLE EAST CRISIS, PROPERTY AND HOUSEHOLD INDEBTEDNESS -25 February 2010

Unpredictable Middle East is raising the risks to the local housing market and to household finances

As Brent Crude oil prices hit intraday levels of around $119/barrel, sharply up from below $100/barrel only a few days ago and fuelled by major unrest across several countries (the most troubled one seemingly Libya at present), those of linked to the domestic residential property market in some way would do well to appreciate that global oil markets and our local residential market do have a very significant link.

The link to local property comes via 3 key routes. Firstly, given major economies’ high dependence on oil, notably the world’s largest economy the USA, sharply higher oil costs can hamper economic growth in those countries. This in turn can negatively affect the demand for exports from a country such as South Africa, hampering our economic output, job creation, and thus income growth.

That implies the risk of a negative impact on potential residential property purchasing power, should this oil price surge persist.

The second link comes via the impact that higher oil prices can have on domestic inflation raising not only the price of petrol as paid by the consumer, but also on the price of certain consumer products and services where petroleum is used as a production input. During the last global oil spike of 2008, the rise of oil prices were even said to have some impact on the food price spike at the time, this being due to higher oil prices improving ethanol planting prospects, and speculation that this may “crowd out” a portion of agricultural production. This all helped to drive our own inflation significantly higher and “crowd out” a portion disposable income that may have in part been used for housing or home loan debt-servicing purposes.

Thirdly, given the SARB’s inflation target of 3% to 6%, rising inflation can ultimately mean rising interest rates, and that can be a major negative factor for such a credit-driven market as the residential property market.

At present, I would not even like to hazard a guess as to where the Middle East Crisis is going to end. As quickly as oil price spikes appear they can also disappear. Hopefully the situation will be resolved speedily. However, it is important to realize that the 2008 oil price spike played an important role in the housing slump at that time (although to date the current oil price is still a fair distance lower than the near- $150/barrel peak of 2008), and such a spike can do so again. With the crisis seemingly having become a multi-country issue, it significantly raises the risks to the economy, to inflation, and thus to the well-being of the local residential property market.

Therefore, for the time being our Firstrand expectation is for interest rates to only start rising late in 2011, and for the rise to be slow and moderate, with inflation rising only gradually to the higher end of the inflation target range. This expectation has been based on gradually growing global inflation pressures for some time. The Reserve Bank has recently been warning about inflation risks. That has been, for some time, the anticipated source of risk to residential performance. Under this moderately deteriorating inflation and interest rate scenario we anticipate some mild house price decline for 2011 as a whole.

It would be premature to change any predictions away from the very moderate scenario sketched for 2011. How the current volatility in the oil market is going to play itself out remains to be seen, and is far from predictable. However, our view is that it does add significantly to the already-perceived risks, and the currently high household debt-to-disposable income ratio of 78.5% (not far from historic highs of 82%) makes the country’s household sector vulnerable to external shocks. It is thus a time for especially potential credit-dependent home buyers to proceed with caution, until such time as the world had greater clarity on where the politics of this major oil-producing part of the world is headed.

Mortgage Plus offers a wide range of advice on different bond options and further advice on the above. Please call us for further information on:

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MORTGAGE BONDS from Mortgage Plus     (011)327-4489

There are so many types of mortgage bonds which are currently available that it can be an often confusing and intimidating task when wanting to take out a mortgage bond which will be most ideal for you. This is where Mortgage Plus can help. With their in-depth knowledge in the mortgage bonds available and what each option entails, this mortgage bond originator is able to guide the prospective of a mortgage bond to eventually decide upon the best option which will match their needs and requirements.

These numerous types of mortgage bonds which are available from the major banks in South Africa such as ABSA, Nedbank, FNB, and Standard Bank, include a few of the options as listed below:

First time buyers Home Loan: This is a special mortgage bond option in that it is ideal for those who have never owned a property or taken out a home loan. With this mortgage bond, the banks will lend you more than 100% of the property value, enabling you to include the transfer and registration costs into the mortgage bond; and hereby making it easier for you to enter into the property market. No deposit is required with this option.
(for the right purchaser) 

A Variable Home Loan: Given at the negotiated interest rate, this mortgage bond option is the traditional home loan optional. Home Loan rates are always negotiable, and are generally affected by the amount of the loan taken out. The smaller the loan, the less chance you have of getting below the prime lending rate. With this type of home loan, if the interest rates increases by 1 percent, your home loan rate will increase accordingly. If the interest rate drops, so will your home loan rate.

Fixed Home Loan Rate: With this type of home loan, your interest rate is fixed for a period of time; for one or two years on average. When considering this mortgage bond option do keep in mind that the interest will be slightly higher than the current loan rate. The beneficial advantage of this option is that it offers you protection from rising interest rates, so for that period of time you know what your bond repayments are. The only downside is that if the interest rates drop, your home loan rate will stay unchanged, resulting in you having to fork out more money at the end of the day.

Capped Home Loan Rate: With this type of Home Loan, you will never pay more than the capped rate, as your interest rate is capped at a maximum rate of interest for a period of time. And if the interest rates increase, you will never pay more than the capped rate you have negotiated. The outstanding pleasure which comes along with picking this option is that you will reap the benefits in the case that rates decrease.

Please do take note that this type of mortgage bond is not so readily available, and there is certain criteria required before your designated bank will approve your application.

For more information on these mortgage bonds and other options, speak to one of Mortgage Plus Mortgage Bond Originators and they will give you details and advise to set you on your way to taking out a mortgage bond you can ultimately afford and will enjoy in the long run.

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Mortgage Plus has a facility online which allows prospective clients of mortgage bonds to apply quickly. Essentially this innovative service of Mortgage Plus has been well-accepted as it saves time and takes away the frustration which would usually come along with making an application for a mortgage bond.

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Speak to a home loan consultant about financing your new property or reviewing your existing mortgage. We are able to assist in lowering your bond repayments and securing attorney discounts.

Complete this short form online
Call us on 011.327.4489
Email: morne@mortgagepluscc.co.za

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