Rate cut comment - Sotheby's International Realty

The real importance of this week's one percentage point cut in interest rates is that it will help existing homeowners to keep their homes and start to turn the tide of bond defaults and repossessions.

"The rate cut - the third since December - is an important step in the right direction for the property market," says Lew Geffen, chairman of Sotheby's International Realty in SA. "It will probably not have a noticeably beneficial effect on sales volumes or property values, because the main obstacle to buying at the moment is not actually interest rates but the high deposits required by the banks before they will grant home loans. There is also always a six to nine month lag between any interest rate shift and its effect on sales.

"However, it will immediately mean a further drop in monthly bond instalments as well as other debt repyaments, and for very many homeowners we believe this relief could well make the difference between being able to keep their home now or having it repossessed by the bank. And that will mean that there is less inventory when the market does turn, so prices will start to rise more quickly."

Indirectly, he says, the interest rate cut could also lead to banks rethinking their current deposit requirements. "If there are fewer bonds in arrears and fewer properties in possession, the banks will probably start to feel less nervous about the property market and more inclined to relax their lending criteria."

The repo rate cut that was announced on Tuesday afternoon by Reserve Bank governor Tito Mboweni was matched shortly afterwards by prime rate amd mortgage rate drops on the part of the major banks. In real terms, it will slice just over R700 a month off the repayment on a R1m bond, and take the total instalment savings since the Bank started cutting rates in December to around R2200 a month.

Article by: www.lewgeffen.co.za