South African Property News

Lower Income Groups Hit Hard

An article published on the Iafrica Business website has suggested that the latest interest rate hike will have a negative effect on the residential property market, particularly in light of the predicted recovery this year. The latest hikes are expected to delay the recovery considerably. The South African Reserve Bank hiked interest rates by a further 50 basis points in January, bringing the increase since June 2006 to 450 basis points.

“Whereas we had expected rates to move sideways for the entire 2008, a scenario which I believe would have led to a gradual recovery in residential demand as from mid-year, such a recovery has in all probability been delayed considerably, and it will take substantially longer for household confidence to start recovering,” according to John Loos, a property strategist for FNB.

House prices have already felt the pinch of higher interest rates, with Standard Bank’s property gauge reporting a drop in residential property prices for the first time in eight years during March. This pushed the y/y inflation to a negative 5.2% y/y.

Loos added that the news would increase the likelihood of a small period of national house price deflation, which might have been avoided had the rates been kept on hold. When splitting up the market by price category, Loos says that the combination of rate hiking and high food price inflation will bring the superior performance of the lower-priced end to a close.

“Lower income groups face the ‘double-whammy’ of rising interest rates, as well as high food price inflation. Food price inflation affects lower income households worse because it consumes a higher portion of their total income,” he said. Loos also suggested that those strongly holiday property-driven areas are probably also in for a torrid time, until such time as the interest rate cycle has made a clear turn.

A sector that will benefit from the rate hike is the rental market. “FNB’s rental property barometer has already been pointing towards a recovering rental market, and I believe that in the current environment of uncertainty and negativity, the resumption of rate hiking will be an additional boost for rental demand,” reports Loos.

The information in this article is courtesy of Tiisetso Motsoeneng (“Rate hike to hit property market”, I-Net Bridge, 10 April 2008).

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