Predicting a pendulum swing in rates

Things have been great. They've been great for a long time and especially in property. Surely it must come to an end sooner rather than later. Isn't that what everybody is thinking? South Africans just hate being optimistic and upbeat. I don't know what it is about us that makes us always pinch ourselves to check whether we're dreaming as soon as things are going swimmingly.

Well, for the last two years now people have been calling an end to the property hype/boom/bubble scenario, and, just maybe, this time 'they' might be correct and the party might be coming to an end. Last week saw the Honourable Tito Mboweni rumbling about possible rate increases. Do we take this seriously? I seem to recall that Mr Mboweni makes these rumblings approaching Christmas every year as if he has decided that he needs to step into the shoes of Scrooge and cry 'Bah Humbug!' if no one else can be found for the job.

Or is he following the much more appropriate looking Scrooge of Al Greenspan whose raised rates steadily and mumbles about 'froth' and exuberance in the US housing market? He hasn't bothered much with being a follower of the USA and European economies and has adequately made his policies befitting his own country and our place in the international community.

Calling the rate
This year, however, he does have some ammunition in terms of the unprecedented oil price and an escalating inflation rate, which is starting to edge towards his upper parameter of 6%. The 'smart money' of the bond market is already reflecting a 50 basis point increase in December. (Thanks for the heads-up Adrian.) This has historically been more accurate at predicting the direction of the rate than the economists, possibly because economists have philosophies, standpoints and theories whereas the bond market reflects where people are putting their money. That's a much more sober endeavour than just calling the rate; putting your money where your mouth is or walking the walk, so to speak.

The stuff Property Booms are made of.
Property booms are not made solely by low rates! Think about that. That invaluable insight comes courtesy of Ronald Ennick, Pam Golding Properties' Gauteng MD and the group's chief operations officer, points to a boom in the late 80's with rates at almost double the current rate. As I understood Mr Ennik, booms are a factor of confidence. Confidence in the country. Confidence in the future. Confidence in the economy. Confidence in yourself.

People need a level on confidence to invest, as we are all too aware that property is a long-term venture and that that mortgage might be your biggest investment ever.

Good and Bad
Do I think the rate is going to go up by ½ percent? I have no idea. The better question is probably "Do I care"? Of course I care. It hits me in the pocket just like every other homeowner out there with a variable rate bond, and then some too. But professing to be a property investor and always punting the medium to long-term view, should I really be that concerned about a rate increase?

Maybe I'm an optimist that always sees the silver lining, but if a slight upward tic in rates is what it takes to take the 'irrational exuberance' out of the property market, I'm all for it.

Rental and Rates
If the rate pendulum has reached its turning point, then the rental pendulum should be hot on its heels, which is good news for some investors. The last few years has seen rental yields dropping dramatically as previous tenants sought to buy their own little piece of home. Now, with prices reaching new heights and fear of escalating rates, the rental market is sure to show signs of growth.

All in all, a rate rise might help temper some of the sellers' greed and make investing worth the effort and hassle even if more expensive.

Finally
Mr Mboweni might be lucky that his words don't have as great an effect on markets around the world as Al Greenspan's do. After his 'Irrational exuberance' speech in 1996, markets around the world fell by as much as 4%.

Here's hoping that the party isn't over and rather just edging towards a newer more sober phase and that when this party is over, we're not all left with the mother of all hangovers.

Article by: Dave Welmans - (www.thepropertygame.co.za)