Property market dreads rate hike

Hopefully, Ms. Marcus will have mercy on us all ... especially those involved in the property sector.

It is easy to blame AMCU, corruption, etc but (unfortunately) we seem to be at the mercy of international winds of change, which are difficult to predict and impossible to redirect.

Gareth Shepperson
Commercial and Property Attorney

Property market dreads rate hike

The mild improvement in the residential property market is likely to be nipped in the bud if interest rates are increased this week or later in the year.

Fears about rising inflation caused by the recent sharp depreciation of the rand have resulted in increased speculation of an interest rate hike at this week's meeting of the Reserve Bank's monetary policy committee (MPC).

John Loos, a household and property sector strategist at FNB, said yesterday that the bank believed interest rates would not increase this year, but next year when house price growth would slow down again.

If interest rate hikes were brought forward, it would depress house price growth, which would then fall below the inflation rate and be negative in real terms, he said.

However, Loos said FNB believed interest rates would not be increased during the first half of the year. At the earliest they would rise later this year, maybe in the fourth quarter.

Loos stressed that the recent improvement in house price inflation was not extreme and not based on stronger demand growth, but mounting supply constraints.

Absa property analyst Jacques du Toit said any repo rate hike would be negative for the residential property market, but the first 50 basis point increase would have more of a psychological impact because consumers would realise it was the end of the sideways movement in interest rates.

But Du Toit said if the rising interest rate trend then continued, it would start to bite into the market because the affordability of mortgage finance would come under pressure at a time when consumers were in a poor financial position.

However, Du Toit did not think interest rates would increase this week, and believed that the MPC would not act too soon but closely watch the situation to see how the depreciation of the rand worked through into the inflation rate.

There was no chance of an interest rate cut in the short to medium term, Du Toit stressed, while a rate hike would place pressure on consumer spending power.
'The consumer is still an important part of the economy and household consumption expenditure still accounts for about 61 percent of total gross domestic product. The household sector, therefore, remains an important factor when it comes to economic activity, so it's a balancing act [for the MPC] between all these things.'

If interest rate hikes were brought forward, it would be negative for house price growth.'

The view from Absa Capital is that interest rates will remain steady this year and there will only be hikes next year.

However, Du Toit said if the current trend in the exchange rate continued or the value of the rand remained weak, it would place upward pressure on inflation and work through to monetary policy.

FNB's latest estate agent survey for the fourth quarter of last year revealed that 20 percent of sellers indicated that they were selling to upgrade, the highest proportion since this question was introduced into the survey in late 2007.

The survey also revealed that the financial health of homeowners in the lower-income segment had improved more rapidly than the other segments, with sellers in this income group who were selling due to financial pressure improving from 38 percent in the second quarter of 2009 to 15 percent last year.

But Loos cautioned that low rates masked financial frailties, adding that the lower end of the market was more sensitive to interest rates because it was highly dependent on credit.

Business Report


  1. OK - so no mercy it is then! Interest Rates up 50 basis points. REPO Rate now 5.5%.

    This is ostensibly to guard against Rand weakness and the inflationary pressure that a weak Rand exerts.

    Reserve Bank Governor Gill Marcus and her Monetary Policy Committee forcast "...average inflation rate for 2014 is 0.6 percent points higher at 6.3 percent...". That is out of the target range and I suppose they had no choice.

    At least the increase is not 500 basis points like Turkey.


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Denny Crane

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It's not me ... yet. Denny Crane from the TV series Boston Legal. Click on picture if you're not sure who he is!