This is in light of predictions that interest rates will in all likelihood rise again during the course of next year, albeit only by a few percentage points.
Gerhard Kotzé, CEO of the ERA property group, says the Reserve Bank’s decision to retain interest rates at the present levels is obviously welcome for home owners, but the long-term prognosis is that rates will gradually rise and property stakeholders should plan accordingly.
His views are based, in part, on comments by the Director of Standard Bank Home Loans, Funeka Ntombela, who was the keynote speaker at the recent ERA South Africa 2010 awards ceremony.
Ntombela outlined her prediction of a continued upturn in the property market. But at the same time she hinted at the probability of future increases in interest rates, due amongst other reasons, to South Africa’s future borrowing requirements.
“The last property bubble was fed partly by low interest rates as well as by unfettered lending and the ‘securitisation’ or bundling of mortgage bond debt into dubious financial instruments, much of it being of low quality,” Kotzé says.
“Consumers played their part in that they acted in the belief that cheap money would remain available indefinitely. This proved not to be the case and while I am all in favour of low interest rates, I believe caution should always be the watchword.
“The banks themselves are setting the tone in this respect with their conservative lending policies of the moment, but home buyers and sellers should also play their part by borrowing conservatively.
“That implies the need either for increased deposits, if at all possible, when buying a home, thus reducing the size of the bond and the associated repayments or buying less expensively on the understanding that building up a stake in property is a gradual process.
“Fundamentally it’s about avoiding a repeat of the situation where, as a result of the credit crunch, interest rates soared by 5% or 6% and home owners were severely stretched financially.
John Loos, property economist at FNB, echoes Kotzé’s sentiments and said buyers must make provision for at least 4 to 5 percentage points’ worth of interest rate hikes, “given that it is likely that we are near to the bottom of the cycle”. “The fact that rates will go up at some point is one of the certainties of life, and nobody ever gets their forecasts right all the time, so always be able to afford such rate hiking.
“If one can’t absorb such hikes, it would probably be better to buy cheaper. In addition, find out what the rates bill is on a home that one wishes to buy, and allow for big increases, given that Eskom is hiking the electricity component by around 25% per year next year and the year after, while water and municipal assessment rates are also rising faster than CPI inflation, with big infrastructure upgrades requiring funding.
“Buying well below one’s means limit is the general message. While some may say that this should always be the case, it is even more crucial at present given the abovementioned home-related utility cost increases looming.”
Jacques du Toit, property strategist at Absa, says his expectations are for rates to remain unchanged up mid-2011, when rates will be hiked by 50 basis points and hiked further to reach a level of 11,5% by end-2011. “The peak is at 12% in 2012.”
He says affordability will obviously be influenced by these rate hikes, so house price growth of above 10% is expected in 2010, but dipping below 10% again in 2011 as a result of base effects (strong growth in 2010) as well as the effect of the higher interest rates.
“My advice to buyers and sellers would be to monitor the broader economic cycle, as well as the factors affecting the property market, such as interest rates, consumer confidence, household finances.”
Loos says his assessment is that there won’t be any interest rate hikes until the latter half of next year. “However, I do expect to see growth in the market starting to slow in the second half of this year, due to a lack of further interest rate cutting stimulus. I do think it’s possible to get further minor rate cutting, but at the slow pace the SARB has been moving since August 2009, such minor reduction is unlikely to make a dent.
“By slowing growth I mean that house price inflation continues, but at a slowing rate in the second half of 2010 and back into single-digits by 2011.” – Eugene Brink
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