Interest-rate cut welcome – but should be only a first step
The 1% drop in the interest rate decreed this week by the SA Reserve Bank is welcome – but will have to be followed soon by cuts of at least another 1% if the SA residential property market is to recover momentum and start seeing value rises.

This is the view of Tony Clarke, MD of Rawson Properties.

“A 1% drop,” said Clarke, “enables a someone with a R1 million bond (over 20 years) to reduce his mortgage payments from R12 440 to R11 720 per month. Homeowners are grateful for the almost R2 000 reduction in bond repayments since the interest rates started to decrease in December 2008. In 2006, however, when the rate was 11%, a R1 million bondholder would have paid only R10 320 per month.

“We need now to get back to that position.”

Clarke said that Tito Mboweni, the SA Reserve Bank Governor, has almost always adopted an ultra-conservative, cautious, inflexible fiscal policy and then waited to see how the market responded.

“In some respects this slow-to-change attitude has been beneficial to South Africa but at the moment it is inappropriate. At this point in our economic cycle we need to be bold, to go for a 2% to 2, 5% or greater cut. The 1% decrease will not be sufficient to stave off a technical recession over all markets, especially the vehicle market.”

Other countries, said Clarke, have seen their interest rates cut by 80% over the last year or so – to the point where in some cases they actually cannot be cut any further.

A further significant drop, said Clarke, could not only revive the average South Africans' desire to be a homeowner and open the market to a wider cross-section of people – especially at the lower end of the income scale – but it is likely also to stimulate the banks' appetite for lending.

“The banks’ reluctance to commit cash to mortgage bonds,” said Clarke, “has put an even bigger brake on the housing sector than the high interest rates but we have seen renewed activity in the market place. In 2009 more people are putting pen to paper to make offers and sign deals than have done so in the last 14 to16 months. However, the challenge is still the reluctance of the banks to approve home loans.

“With the monetary policy committee now meeting once a month, the chances of a further interest rate are excellent and the market, in my view, is already reacting a little more optimistically,” said Clarke.

Article by: www.rawsonproperties.com