News: SA set for 'gloomy' Christmas

Mon, 29 Oct 07

SA Consumers’ Christmas stockings might just hold the unwelcome surprise of yet another interest rate hike. If so, it will be the eighth rise since June last year, reports MyProperty South Africa (http://www.myproperty.co.za)

The Reserve Bank Governor Tito Mboweni announced a 50 basis point increase in the repo rate to 10.5 percent on Thursday, 11 October and Banks did not hesitate to follow suit by raising the prime interest rates to 14%.

This amounts to a 350 basis point increase in interest rates since June last year which has caused the average monthly repayment on a home loan to rise by 24,6%.

“Economists are foreseeing the possibility of another interest rate hike before the year runs out in order to cool down consumers’ excessive spending and to curb inflation,” says David Rodgerson, Broker/Owner of Remax Bay in Port Elizabeth.

Big threats to inflation

Confirming this possibility is Andrea Atkinson, Manager of Bond Choice in Port Elizabeth. “Economic reports warned about an interest rate hike in October as well as another rise towards the end of the year, after which interest rates will then start moving downwards by the end of the first quarter of 2008.

The recent hike followed on the back of the Reserve Bank’s determination to see inflation, which had deteriorated modestly, drop into the target range of under 6%. According to Atkinson, an oversupply of credit to consumers, coupled with high fuel and food prices, are the biggest threats to inflation.

“The interest rate is not measured against the exchange rate any longer, but rather against the country’s inflation rate. This means there is very little chance of the interest rate reaching the 20 percent plus mark, as it did during the late 1990’s,” she says.

“Previously, the Reserve Bank’s instruction was to protect the foreign exchange rate whereas it is now mandated to protect the inflation rate. Any decision to hike the interest rates will therefore be the result of consumer spending getting out of hand and it is common global practice to bring this under control by raising interest rates. Consumers should see this as a benefit to themselves and not a negative.”

Latest hike will influence affordability

As for the property market, Atkinson predicts that, though the latest increase will influence affordability of housing negatively, it will stimulate property-related activities as home owners are forced to sell and return to the rental market.

“Especially at the bottom- to middle segment of the market, property owners are starting to feel the pinch of higher interest rates,” she says.

This, according to John Cooper, Chass Everitt Broker/Owner in St Francis, does not mean the Eastern Cape property market is in a state of depression or recession. “There is no boom or bust in the local property market, but prices have flattened out which was to be expected after the dramatic property price-increase over the last couple of years.”

According to Cooper, sales figures for speculation properties such as vacant land has dropped and on the back of a 70% escalation in building costs, buyers are shying away from the option to built. More and more buyers, he has noticed, are purchasing properties for living- as oppose to speculating purposes.

Both Cooper and Rodgerson agree to the fact that the dramatic rise in the price of property, coupled with the rising demand for property a number of years back, made it seem as if the real estate market offered a quick option to accumulate wealth: not only for buyers and sellers, but also for real estate agents.

Normalisation of the market

While this might have hold truth when sharp upward property price growth exceeded projected expectations, it is no longer the case and they advice all property role-players to adapt to the normalisation of the market.

“Sellers are still expecting inflated prices for their properties and unapprised estate agents are giving in to sellers’ unrealistic price-demands, Cooper explains. “The result is wasted marketing expenses and unhappy sellers which will then mandate another agency to take care of the sale of the property: at the correct market-related price.”

Says Rodgerson: “The current market conditions in the Eastern Cape will increasingly put estate agents’ expertise to the test. Property returns are under pressure and have caused buyers to become more careful about their purchases.”

Rodgerson further advices: “It is paramount that the services of only highly skilled property professionals should be sought  by buyers and sellers alike, while estate agents should pre-qualify potential buyers with the help of a consultant.”

“Now is the time when the boys will be sorted from the men within the real estate fraternity. Estate agents who allow sellers to insist on setting asking prices instead of educating sellers by means of a professional comparative market analysis, will not last under these current conditions,” says Cooper

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