Bracing for a property market slump
Estate agents, property owners brace for tough times, as Tito Mboweni punishes consumers.

The residential property party is officially over. Estate agents and owners are bracing themselves for tough times following the latest interest rate increase, announced on Thursday.
Many economists were not expecting SA Reserve Bank governor Tito Mboweni to push the interest rate up again. But he did, after the two-day Monetary Policy Committee meeting.

Reasons for the seventh half-a-percent increase include that inflation is still too high for Mboweni's liking. The SA Reserve Bank uses interest rates as a mechanism to force people to spend less money on goods and services, as more income goes into repaying debt.

The National Credit Act (NCA), fully implemented from June, has already acted as an additional brake on spending, with consumers finding it tougher these days to obtain credit.

Absa senior economist Jacques du Toit warned, shortly after the increase in the repo rate to 10,5% was announced, that the housing market will show the effect of higher interest rates.

The higher repo rate means banks will raise prime and mortgage rates to 14%.

Interest rates have shot up by 3,5% since mid-2006, ramping up home loan repayments by around 25%, according to Absa.

"The latest interest rate hike will further negatively influence the affordability of housing, and with debt servicing costs set to rise to higher levels, consumers' already stretched financial position will come under even more pressure during the next few quarters," said Du Toit.

Du Toit expects house price growth to slow to down further, bringing it to around 14,5% for the full year.

Standard Bank warned earlier this month that an interest rate increase could mean a big change for the property market.

A grim 5,7% year-on-year increase was reported by Standard Bank in its monthly residential gauge of median house prices for September - which suggests property prices were rising at a slower pace than inflation (around 6,5%).

The median house price is a figure that suggests half of all houses are more expensive and half less expensive than that price. The median house price for September was R560 000.

Jeanne van Jaarsveldt, marketing and financial director of RE/MAX of Southern Africa told his associates around the country earlier this week that another rate hike "could be substantially detrimental for the lower end of the residential market".

First-time buyers will battle more than ever to find money for homes.

The interest rate increase in August was the "‘straw that broke the camel's back' for marginally financially-able home-owners", he said.

Van Jaarsveldt said the current real estate market contributes around 21% to the national Gross Domestic Product. The latest hike would "further impact" a cool market.

Repossessions and bad debt are expected to pick up, he said.

Samuel Seeff, chairman of Seeff Properties, called Thursday's interest rate increase "a mistake" and predicted that the market would take "a long time" to recover from it.

"The previous rate increase has bitten significantly into property, motor sales and general credit levels," he said.

Herschel Jawitz, chief executive officer of Jawitz Properties, told Realestateweb he does not expect a market crash; instead prices should rise more slowly.

The market has now normalised and "buyers certainly aren't tripping over their heels to put in offers", said Jawitz, adding that he expects the lower and middle markets to feel the squeeze the most.

Tony Clarke, managing director of Rawson Properties, called the latest increase "sad" because the full effect of the NCA has not yet been felt by the market.

He said that trying to predict the impact of interest rate hikes is "a bit like trying to predict the weather", however he expects price growth to at best move into single digit terrain.

John Loos, a senior property strategist with FNB, said the cumulative effect of seven interest rate increases is "quite significant".

Someone with a bond of about R1m is now paying not far off an extra R2 500 on their mortgage repayments thanks to these rate hikes.

Loos does not expect prices to plummet, but they will rise more slowly.

Residential and retail property will take a knock as a result of the interest rate increases, but industrial and office property should continue to perform, thanks to low vacancy levels and relatively high rental inflation, said Loos.

Conditions should remain tough for estate agents, property sellers and those who are looking to buy into next year, is the FNB view.

Article by: Jackie Cameron -