Rates Reaction John Loos
(March 23) - Todays interest rate cut on top of a total of 150 basis points worth of reduction since December 2008, begins to make the interest rate stimulus significant, according to John Loos in his reaction to the Monetary Policy Committee move.
On a R500 000 20-year bond at prime rate, the reduction in the monthly required payment value since the 15,5% prime rate at beginning of December is now R912 in total, i.e. just short of R1k per month lower.
The First quarter FNB Property Barometer has already shown some mild strengthening in residential demand activity since late-2008, firstly on the back of expected interest rate cuts and then more recently on the back of actual rate cuts, and we expect the mild improvement to continue through the year.
During the second half of last year we also began to see the household debt-service ratio decline due to a declining debt-to-disposable income ratio, and falling interest rates will further help the cause. A declining debt-service ratio normally signals a declining mortgage loan default rate, and it is expected that later in 2009 the start of decline in default rates will indeed materialise.
Already in the second half of 2008 we saw a steady decline in year-on-year growth in insolvencies from a peak of 102% in the second quarter to 26% in the fourth quarter, which suggested early signs of a move towards an improvement in credit quality.
Loos emphasises that the usual warnings come with his comments, i.e. that while mild improvement is expected in residential demand and the start of improving mortgage credit quality later in the year, fireworks shouldnt be expected under the current recessionary conditions.
Also bear in mind that, despite a declining debt-to-disposable income ratio, household indebtedness still remains significantly higher than it was during the last bout of aggressive rate cutting in 2003, and this implies that the household sector these days is less responsive to an interest rate stimulus than it was then.
Loos says Firstrands expectation is for further rate cutting at subsequent meetings to around 11% prime by midyear, all of which will make the cumulative interest rate stimulus to the housing market quite significant.
Although stringent bank lending criteria in the form of deposit requirements are likely to be slow in being relaxed, lower interest rates do improve affordability, which is a key consideration in granting loans, and in this sense rate cuts imply relaxation of lending criteria.
Article from: www.rodneyhayter.com