Mboweni boosts your bank balance - for now

Last interest rate cut? Some economists think so.

Your home loan and other debts have just got cheaper and the economy has just received a welcome fillip in the form of SA Reserve Bank Governor Tito Mboweni's latest repo rate cut of 0.5%, bringing the rate to 7%. Commercial banks are expected to follow suit in cutting the prime interest rate they give their customers to 10,5% following Thursday's announcement.

Absa was first to announce it would lower its prime interest rate, from Friday 14 August, issuing its statement minutes after Mboweni had delivered his.

Home loan payments are now more than 25% lower than they were in December, thanks to aggressive repo rate cuts since then.

Luthando Vutula, managing executive of Absa Home Loans, said the "further cut in interest rates implies that mortgage repayments have dropped by 26,3% since December last year when the mortgage rate was still 15,5%". This means, he said, the monthly repayment on a R500 000 mortgage loan over a 20-year term has dropped by another R169 after the latest rate cut. "This implies a cumulative monthly saving of R1 778 on a R500 000 mortgage loan since December last year," added Vutula.

The bank's senior property analyst Jacques du Toit said: "Interest rates have been cut by a cumulative 500 basis points since December 2008, with prime and mortgage rates now back at their mid-2006 levels before rates were hiked as a result of rising inflation."

Du Toit said households still feel heavily indebted, however the latest interest rate cut will improve the affordability of housing. "Total household debt as a percentage of disposable income was at 76,7% in the first quarter of 2009, while outstanding household mortgage debt was just below 50% of disposable income in the quarter."

Unfortunately, Du Toit doesn't see house prices going up any time soon. Nevertheless, the pace of deflation is expected to slow.

He said: "Average nominal house prices are back to levels last seen in the second quarter of 2007, while in real terms, prices are at their lowest level since mid-2005. Nominal house price deflation is set to continue for the rest of 2009, but the pace of deflation is forecast to slow down towards the end of the year. House prices are projected to decline in real terms for a second consecutive year in 2009."

Investec expects this to be the last interest rate cut. Investec Group Economics' Kgotso Radira said shortly after Mboweni's announcement that the "interest rate cut will provide additional relief to the debt stricken households and boost business and consumer confidence. This is key to the recovery process from a recession. We believe this is likely to be the last interest rate cut in the cycle, but much will depend on future economic data."

And Cadiz Asset Management's chief economist Adenaan Hardien said the implication of this week's cut is that rates will start rising earlier rather than later. He said: "Our view was that the MPC would not cut today, despite recent growth figures disappointing on the downside. This was premised on the assertion that, while growth remained weak, this was to be expected given the usual lag between rates and economic activity, and the outlook for inflation remains unflattering.

"Today's cut raises the prospect of rates being tightened sooner than might otherwise have been warranted. We don't expect further easing after today, and chances are that the MPC will start hiking rates sometime over the first half of 2010."

Mboweni cited falling house prices and lower car and retail sales' volumes among the factors considered by the Monetary Policy Committee before it decided to chop the repo rate yet again, but said the bank isn't in the business of making decisions to favour one sector or another. There has been concern that lower interest rates have helped strengthen the rand, to the detriment of export-oriented manufacturers.

Although inflation-targeting is the priority, the bank takes the broader economic picture into account. South Africa's economic growth has been shrinking fast this year, leading to job losses. There are hints of a possible global economic recovery later this year and some signs things will pick up for South Africa, though looming higher petrol, electricity and wage bills are clearly a worry for monetary policy decision-makers.

CEO of Jawitz Properties Herschel Jawitz said the "impact of the rate cut now will only be really felt into 2010". "The latest cut will continue to take pressure off existing homeowners in terms of their monthly repayments. This is important as it will continue to slowdown the number of repossessed properties and distressed sellers on the market which obviously impacts on property prices."

Jawitz predicted it would "take some time for buyers to really climb back into the market due to high levels of indebtedness and job concerns, but every rate cut helps get people back on track as their overall debt repayments come down".

"With interest rates reducing and property prices still soft, buying is becoming more and more attractive from an affordability point of view. Unfortunately with the banks' lending criteria it is still difficult for buyers to take advantage of the opportunities but that will also change." Mboweni also noted on Thursday that loan application declines have been "due in part to stricter lending criteria".

Mboweni added that contrary to popular public opinion he is still going to be on the scene as SA Reserve Bank governor until November. He would not be drawn on whether he thought this might be the last repo rate cut on his watch.

So far, falling interest rates have failed to stimulate consumer-spending and, in particular, the property market. Dr Andrew Golding, CEO of the Pam Golding Property Group, said although potential buyers have shown increased interest in properties, "unit sales have not materially improved, and there is still a great deal of stock on the market at present".

"One also has to bear in mind that we are still in midst of winter which traditionally is generally a somewhat quieter season for the residential property market, particularly in some areas," he said.

Article by: Jackie Cameron - www.realestateweb.co.za