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Dec 12, 2008:
There was a collective sigh of relief from the nation as SA Reserve Bank governor Tito Mboweni chopped the repo rate by half-a-percent on Thursday, paving the way for lower interest rates from commercial banks - and further cuts next year.
However, the latest cut is likely to chop so little off individuals' debt repayments that it is unlikely to provide a much needed boost to the property market any time soon.
That was the general consensus from analysts following Mboweni's announcement, in which he conceded that a "subdued" property market was among the reasons for a decision being taken to finally cut the interest rate.
The repo rate, the key monetary policy interest rate, is now 11,5%. This will lower the prime and mortgage rates offered by banks to their customers to 15%, though some bank clients may enjoy more favourable rates. Big banks responded quickly to the interest rate decision, with Nedbank the first to announce it was following suit in cutting the rate for its customers.
This is the first time the repo rate has been lowered in two-and-a-half years.
Since June 2006, interest rates have been climbing steadily, with the extra 5% hammering consumers and ramping up home loan repayments by more than 30%.
The economy in general has been taking strain, with thousands of jobs being shed as a result - and more job losses to come, particularly in construction and real estate.
Mboweni told journalists that two Monetary Policy Committee members had raised the possibility of a full 1% interest rate cut but the other members, looking at inflation targets, were satisfied with 50 basis points.
John Loos, property strategist for FNB's home loans' division, said the cut implies a decline in prime rate instalment repayment (monthly compounded) of about R185 on a R500 000 bond (20 years) and about R371 on a R1m bond (20 years).
This on its own offers little financial relief to the hard-pressed household sector, but is believed to be only the start of a series of interest rate reductions that Firstrand expects to end about 3,5% lower - bringing prime to about 12%, he noted.
Said Jacques du Toit, senior property analyst with Absa Home Loans, following Thursday's announcement: "Against the background of current and expected economic conditions, especially with regard to inflation, interest rates are forecast to be cut further during the course of 2009.
"However, the outlook for the residential property market towards year-end and into 2009 remains depressed," said Du Toit, adding that the market is expected to bottom around mid-2009 and gradually recover later next year.
A noticeable improvement is not expected before 2010, he cautioned.
Commercial property owners and estate agency bosses expressed disappointment that a full 1% or more cut was not implemented, though the move probably signals that the worst is over for the residential sector, at least.
Said Neil Gopal, chief executive officer of the South African Property Owners' Association: "We require more cuts to really see the effects and the difference. This will inject confidence and growth domestically."
He said "it takes changes in interest rates up to two years to be fully felt, so the effect of the last few hikes are still feeding into the economy at this stage".
"I don't think consumer spending will improve in the short term and we should see some recovery in the retail sector in the second half of next year. We need more government spending on infrastructure projects to ensure jobs in the construction sector are maintained."
Brian Falconer, CEO of Colliers International Residential, was more upbeat. He described the interest rate decision as "the best possible news for the property market, and sends a clear signal to potential buyers".
"The property market is now likely at the bottom, and we have seen historically that an interest rate cut is the signal for an upswing in activity.
"Property prices have not been this low in the last five years, which means it's a great time for buyers. Prices are unlikely to be this low again in 12 months," said Falconer.
Samuel Seeff, chairman of the Seeff property group, said the announcement would help provide some relief to hard-pressed sellers struggling to maintain their bond repayments.
But, "in truth, only a significant interest rate drop of between 3 - 4 % over next year, will have a positive impact on the market", he said.
"The real estate sector will remain depressed until such time as the banks are able and willing to lend money more freely. The market won't move until we see more favourable assistance from the banks," said Seeff.
He added that "even with today's rate drop, the loan to value criteria being determined by the banks is putting the brakes on the housing market's recovery".
Dr Andrew Golding, chief executive of the Pam Golding Property group, said: "Any meaningful reversal or impact will take much longer, as there is a considerable lag before such a reduction takes effect.
"We really had hoped for a more substantial reduction in the repo rate, which would send a more decisive positive signal to the markets and to consumers."
Golding said a greater rate cut "would send a confidence-building message to South Africans, individuals and businesses, that better times lie ahead, particularly given the fact that the fuel price has dropped, the inflation outlook has improved and importantly that the economy has slowed considerably".
Golding said it was hoped that the rate would be chopped by 5% by the end of next year (2009).
"From a property perspective, given that this is to a large extent driven by market sentiment, while the repo rate reduction is positive, it is not expected to have any major effect on the tighter trading conditions currently experienced." These conditions, he said, "are also impacted by the far more stringent credit criteria and conservative approach by financial institutions, among others".
Herschel Jawitz said: "While the lowering of rates on its own will not turn the market, it is a clear signal that the interest rate cycle of the last two years may finally have turned.
"The residential property market is driven both by sentiment and economics. The latest drop in rates will have very little affect on current affordability as interest rates are still at high levels but it will add to the good financial news we have received of late including a very meaningful drop in the fuel price."
Jawitz reckons that a person who drives a normal car and has a mortgage and other debt, will "probably have anywhere from an extra R750 upwards of extra cash per month back in their pockets".
But like others he believes it will be at least another six months before the property market really starts to recover. "Confidence is still low and the high interest rates make affordability difficult. We need the trend to continue for a while."
"In addition, the banks are continuing to tighten their lending criteria which will probably pose the biggest challenge to the markets recovery especially in the lower and middle segments of the market in 2009."
Jawitz pointed out "that there are great buying opportunities to be had at all price levels across the country".
"If rates continue to fall in 2009, those opportunities will not be around indefinitely. Time the market at your own peril."
