0,5% cut in the interest rate now essential

The difficulties currently being experienced by applicants for bond finance are another good reason for a further 0,5% drop in the interest rate, says Bill Rawson, Chairman of Rawson Properties.

“In the 39 years that I have been in property,” he said, “it has seldom been more difficult to get a bond. The applicant has to show that over a period of at least six months his cash flow has been able to support an outlay equal to whatever he will be paying on his bond.

“If, for example, he has been paying R6,000 per month on rent and now wants to invest R10,000 or more per month in a home, he will have to produce very substantial evidence that he will be under no pressure to pay the extra amount.

“If he has impressive assets invested elsewhere this will not make his application more likely to succeed: the banks look only at cash flow. They will also insist on a squeaky clean problem-free debt paying record, even on minor accounts such as those for retail outlets.”

Before the last Monetary Policy Committee meeting, nine out of ten economists, said Rawson, had predicted that a further drop in interest rates was very unlikely, but were then gratified when the South African Reserve Bank did, in fact, authorize another cut.

“Now, with the rate already reduced by 5,5% since December 2008 and with prime at only 10% it could be argued that a further cut is not needed. In my view, however, it is absolutely essential. We need it not only to help the housing market move faster, but also to boost the economy as a whole.”

STATS SA’s January and February figures, said Rawson, show that consumer spending was down by 1,5% and until this begins to rise there can be no significant economic upturn.

“Many emerging middle class people are carrying far too much debt - but there is a growing appreciation in some sectors that this must be reduced, especially if you hope to become a homeowner. A drop in rates will help all those currently paying off debts, particularly those on high HP rates.”

Low interest rates, said Rawson, will encourage people to find outlets other than equities for their investments - and enhance the appeal of property.

“Every now and then,” he commented, “one reads in the press that equities have performed better than property. What these surveys do not show you is that the returns on property are usually better than those on shares for the simple reason that the majority of property buyers are bonded: their actual capital outlay is fairly small but their rents or their profits on their sales are highly satisfactory because they relate to the total value of the property.”

A further good reason for a drop in the interest rate, added Rawson, is that, in boosting the economy, it will boost job creation.

“I suspect strongly that the official unemployment figures are way below the real figures. In many rural areas people are literally starving. In Grahamstown, I am told, over 60% of employable males are jobless. New jobs must become available.

“All the indicators, therefore, point to the May meeting of the MPC cutting the rate by a further 0,5%, giving us the lowest interest rate in some 40 years - and we certainly need it at this stage in South Africa’s economic recovery,” said Rawson.