Comment on interest rate announcement
T H E S O U T H A f r i c a n Re s e r v e Bank’s recent announcement of a cut in the repo rate of 50 basis points came as a pleasant surprise, seeing the economy has already benefited from a cut of 450 basis points since December last year.
Adrian Goslett, assistant regional director of RE/MAX of Southern Africa, says it is positive to note, according to TPN Credit Bureau’s rental payment monitor, that rentals paid on time and in full in the second quarter improved by four percent. This indicates South African consumers are starting to manage cash flow more effectively. “Overall, property activity is expected to pick up as more consumers can afford to buy homes, consolidate their debt and continue to save. A cut in the interest rate puts more cash in the hands of potential home owners and tenants.”
Herschel Jawitz, chief executive of Jawitz Properties, says: “Given the latest economic data and the encouraging inflation figures, the Reserve Bank clearly feels there is scope to drop rates and give the economy a further boost.
“The latest cut will continue to take pressure off existing home owners as monthly repayments will be lower. This is important, as it will continue to slow down the number of repossessed properties and distressed sellers, which obviously affects property prices.”
Dr Andrew Golding, chief executive of the Pam Golding Property group, says the Monetary Policy Committee’s decision to reduce the repo rate may have been unexpected, but it was a welcome move and means interest rates will drop.
“This is a positive step forward for our economy and will help to b o o s t g row t h . A l t h o u g h S o u t h African economic confidence is s l i g h t l y u p, d u e c o n s i d e r a t i o n should be given to the inflationary effects of government wage settlements and high food, electricity and fuel prices. (But) household debt remains high, which makes the recent announcement all the more relevant. We hope this is a further positive stimulus towards the banks’ relaxation of their very stringent lending criteria.
“Though trading conditions remain constrained, there do appear to be glimmers of light at the end of the tunnel. The residential property market is showing increasing signs of activity at all levels. Even in the mortgage sector there are stirrings of life, despite the fact that access to affordable finance remains a key obstacle for home buyers.”
Golding says speculators and longer-term investors are returning to the market, there is increased attendance at show days, and sellers are accepting more realistic prices. There is also a sense banks’ renewed interest in the lending market is
‘Though trading conditions remain constrained, there do appear to be glimmers of light at the end of the tunnel.’
much closer than before, although with high loan-to-value ratios.
“The top-end sector, with its high percentage of cash buyers, continues to perform well. There remain pockets of activity which belie national trends – areas such as Stellenbosch and Grahamstown which, with their distinctive micro markets, continue to experience strong supply and demand.
“Unfortunately, unit sales have not materially improved and there is still a great deal of stock for sale.”
The recent repo rate cut will provide the property market with a little relief, but it is likely to remain stagnant, says Brian Falconer, chief executive of Colliers Residential.
“Given some of the positive indicators that have been unfolding during the year, we would have hoped for more than a 50 basis-point cut – maybe a full 100 basis-points cut,” says Falconer. “Instead, the market will continue to drift along for at least another two months, and possibly until the end of the year.
“The decision, the last under out- going gover nor Tito Mboweni’s tenure, means home owners will continue to struggle under the burden of high monthly repayments, new entrants will find it difficult to acquire homes, developers will struggle to get new developments off the ground and banks will remain reluctant to advance credit.
“The entire cycle is sluggish, and unless interest rates continue to ease… the property market will remain in the doldrums, with negative consequences for all involved.”
The repo rate has been cut by a full 500 basis points since December, and bondholders have enjoyed thousands of rands a month cut off their monthly repayments.
Falconer says a number of factors converged to force the Reserve Bank’s hand with regard to the repo rate and the slightness of the cut:
Re l a t i ve l y h i g h i n f l a t i o n , which is coming down, except for stubborn food inflation.
The sharply rising cost of electricity and the volatile price of oil, which was back up at $70 a barrel at the time the monetary policy committee met.
High wage increases across many i n d u s t r i e s , r u n n i n g we l l ahead of the inflation rate.
The equally volatile rand, which in the past three months has swung wildly in a band between R7.50 and R8.80.
The ongoing global recession, which has caused the South African market to shed hundreds of thousands of jobs.
While global indications are increasingly positive, it will take time for these to work through to South Africa.
“We can but hope for a further rate cut when next the monetary policy committee meets in September,” says Falconer.