South African Property News

Interest Rates Bring Down House Sales

An article in Business Day reports an immediate negative impact on property values across the board after the latest interest rate hike. The Alliance Group auction house expects this to result in a further increase in liquidations in the short term.

CEO Rael Levitt says that the Alliance Group has noticed, “even more valuation decreases in the residential property market and certain sectors of the commercial market”. The Group has also noticed a “decline in values on our auction floors, but it is still too early to provide an exact percentage”.

In fact, between February and March this year, a 56% increase in company liquidations and personal insolvencies was reported and Levitt expects this trend to continue in the short term. He says that South Africans have become used to an “upward trajectory only” in residential property values over the last five years, “Now we are having a dose of reality setting in. All the other issues aside, interest rates have a direct effect on value. When interest rates go up, valuations of property go down”.

Levitt believes that the current problems run a lot deeper than prevailing sentiment. Vacant land prices have dropped by up to 30% in the past six months, with certain residential property nodes showing a decrease of 5-10% over the same time (Levitt). “I don’t expect a residential crash, but I do expect a real correction in prices. How far that correction will go is anybody’s guess.”

However, FNB property strategist John Loos does not expect a dramatic crash in house prices. Given the latest interest rate hike and widespread concern about further increases, the residential property market may be heading for “a short period of mild price deflation,” which would obviously be experienced as more pronounced in reality.

Gavin Opperman, managing executive of ABSA Home Loans, says that the rising interest rates are affecting affordability and making it more challenging for the consumer. “This, coupled with other consumer expenses such as fuel, municipal rates and so forth, will result in a natural slowdown of property growth. We have to realize that we are coming off an all time high in terms of residential property growth,” says Opperman.

Opperman expects a price growth of about 7% this year when it comes to residential property. “South Africans still attach sentiment to property and believe it to be a good investment in their diversified portfolio. Historically, property has always been a medium to long term investment.” He also believes that the hike in interest rates and the slowing growth in property prices will hamper speculative buying.

The information in this article is courtesy of Nick Wilson (“South Africa: Interest Rates Knock House Sales – Alliance”, Business Day, 16 April 2008).

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