Rates reactions - John Loos GNB Home Loans
With CPIX inflation near 10%, and todays 50 basis points rate hike signalling the seriousness with which the SARB takes its inflation targeting job, John Loos, FNB Home Loans Property Strategist, warns that the economy is definitely not out of the danger zone yet with regards to risks of further rate hikes.
As such, he advises the market to proceed with caution when involved in home purchasing and to buy in a price range well within ones means. Scenario planning to allow for the possibility of further interest rate hiking would be a good practice.
Loos says todays news is negative from a residential property market performance point of view. Whereas we had expected rates to move sideways for the entire 2008, a scenario which I believe would have led to a gradual recovery in residential demand as from mid-year, such a recovery has in all probability been delayed considerably, and it will take substantially longer for household confidence to start recovering.
Loos believes that todays development begins to raise the possibility of a small period of national house price deflation, which under a sideways rates scenario he says would have been narrowly avoided.
When splitting up the market by price category, Loos believes that the combination of rate hiking and high food price inflation will bring the superior performance of the lower priced end to a close. Lower income groups face the double-whammy of rising interest rates as well as high food price inflation.
Food price inflation, he points out, affects lower income households worse because it consumes a higher portion of their total income.
Strongly holiday property-driven areas are probably also in for a more torrid time until such time as the interest rate cycle clearly turns.
Loos says the overall impact on home loan repayments since the start of rate hiking in June 2006 is now becoming more than significant. On a R1million house the cumulative impact of 450 basis points worth of hikes is an increase in the monthly repayment value by R3,184.
Every event brings good news, in his view, and the good news in this case is for the rental market and existing landlords. FNBs rental property barometer has already been pointing towards a recovering rental market, and I believe that in the current environment of uncertainty and negativity the resumption of rate hiking will be an additional boost for rental demand.
Many potential first time buyers would probably want to delay
buying, continuing to be tenants for a little longer, while buy-tolet-buying
will probably deteriorate further on the news, constraining the supply
of new rental stock. The combination of constrained supply and strengthening
rental demand is a great recipe for rental market recovery, and I believe
that 2008 will see a considerable widening in net income yields on letting
Article by: www.fnb.co.za