Hard times ahead for home sellers
The interest rate rise announced this week, which pushes the home loan "base" rate to 13,5 percent, may be good for the rand and the overall economy, but it will not be good for the property market.
"This will be the straw that breaks the camel's back," says Lew Geffen, chairman of Sotheby's International Realty in SA. "It may not result in an immediate drop in prices but will result in a quick decline in sales volumes, and that will ultimately lead to much slower price growth."
Until now, he notes, the residential property market has been shielded by rising demand and a lack of stock that underpinned prices even in the face of declining affordability.
"But this week's increase brings the total rise in rates over the past year to three percentage points and we have seen previously that this is the breakpoint in the market, beyond which it becomes much tougher to sell.
"Buyers simply cannot afford the repayments, no matter how carefully they are prepared to budget for a home of their own - especially if they are already contending with higher car, furniture and credit card repayments every month. And now in terms of the National Credit Act, they can't in any case obtain a home loan if they are too stretched financially."
Three percentage points up is also the level at which existing homeowners really feel the pinch and struggle to keep up bond repayments, which means more foreclosures and more properties in possession (PiPs) to add to already higher stock levels.
"In fact we are already stating to get lists of PiPs again from the banks - something we have not seen in years," says Geffen.
Ultimately, of course, this is good news for potential buyers because it means slower growth in prices and a chance for salaries and wages to catch up.
"But for now and about the next 12 month what it means is that the Reserve Bank has firmly put the lid on the market, and that sellers should prepare for extreme negotiability."
Article from: www.sothebysrealty.co.za