Rate cut fuels property boom

Any suggestion that the property market might be due for a correction has been put to rest by the cut in mortgage rates, says ERA property group CEO Gerhard Kotzé.

He notes that the momentum of the market between June 2000 and June 2003 doubled property values on average, and added a further 25.1 percent growth in the year to end-June 2004, according to the Absa quarterly review of house prices.

“So there has been some concern that the boom was unsustainable and that at least a slow down in the pace of growth was on the cards. That concern has now been put to rest with the latest 0.5 percentage point cut in the repo rate, followed immediately by home loan rate cuts by the major banks.”

The quick reaction of the banks is an indication of greater competition for business in the home loan arena, Kotzé says. “Going forward, confidence will have a great deal to do with the health of the market and the rate cut has come at precisely the right time, underlining the attractiveness of property relative to other investments.”

Significant saving for borrowers
Without exception, current feedback from ERA offices countrywide is of continued good turnouts at show days, stronger sales volumes and hardening prices. The market could now be due for a further boost, he says.

The rate drop means a R68 per month saving on repayments for a 20 year bond of R200 000 and a R136 per month saving on a R400 000 bond.

“And while this saving is not really significant in itself, the cut is a strong signal to the market. More importantly, when combined with the 5.5 percent cut in rates last year, it means a homeowner with a R200 000 bond is now paying almost R900 per month less than a year ago and that one with a R400 000 bond is paying almost R1800 less.”

In after-tax money these reductions are even more important and the cuts had a lot to do with the consumer spending boom currently under way.

However, says Kotzé, sellers will need to remain on guard against over-pricing and homeowners avoid the temptation to borrow against the equity in their property to make short-term purchases such as motorcars and furniture.

“Homebuyers, meanwhile, should remember that it is never wise to become over extended in terms of bond payments.

“Indeed, the rate cut is not really enough for first-time buyers struggling to put together the finance for property that keeps on rocketing in value. Government needs to give serious attention to their plight, perhaps by introducing tax rebates on the bond repayments of genuine first-time home buyers.”

Article From: http://mymoney.iafrica.com