Rate Cut: What Do the Experts Say

This article is courtesy of Realestateweb (Tito’s Tonic: Too little, Too Late – 12 December 2008)

Yesterday South Africans heard that the repo rate was cut by half a percent. This announcement by Tito Mboweni is said to pave the way for lower interest rates from commercial banks and even further cuts next year. But the question on everyone’s lips is, is this enough. The cut will not make a major difference to individuals’ debt repayments and would not influence the property market anytime soon, according to analysts.

The repo rate – the key monetary policy interest rate – now stands at 11,5%, which will lower the prime mortgages rates offered by banks to 15%. Nedbank has already announced that they would be cutting the rate for their customers.

This is the first time the repo rate has been lowered in two-and-a half years. Since June 2006, interest rates have been climbing steadily and the extra 5% ramped up home loans repayments by more than 30%. The economy has taken a huge blow and many have lost their jobs and possessions because of this.

John Loos, property strategist for FNB’s home loans’ division said that the cut implies a decline in prime rate instalment repayment of about R185 on a R500 000 (20 years) and about R371 on a R1m bond (20years). Even though this is not much it is believed to be the start of a series of cuts that are expected to end about 3,5% lower - to about 12%.

Jacques Du Toit, senior property analyst with Absa Homeloans said: “Against the background of current and expected economic conditions, especially with regard to inflation, interest rates are forecast to be cut further during the course of 2009.

He added that the outlook for the residential property market towards the end of 2009 remains depressed. A noticeable improvement is expected in 2010.

According to Neil Gopal, CEO of the South African Property Owners’ Association we require more cuts to really see the effects. He added that it takes about 2 years for interest rates to take effect. This means the hikes of last year are still being felt now.

"I don't think consumer spending will improve in the short term and we should see some recovery in the retail sector in the second half of next year. We need more government spending on infrastructure projects to ensure jobs in the construction sector are maintained."

Brain Falconer, CEO of Colliers International Residential, is more positive about the cuts and Samual Seeff, chairman of Seeff Properties agrees but says that only a 3-4% cut would have a positive effect on the market. He added that the real estate market would continue to suffer if the banks aren’t willing to lend money more freely.

Dr Andrew Golding, CEO of Pam Golding Properties says that it will take a while for the rate cut to influence the market and hopes for a more substantial cut. Hershel Jawitz agrees and said that there are great buying opportunities out there and can’t be taken advantage of due to the banks’ strict lending criteria.

But property in South Africa