Lew Geffen has been in the real estate industry since 1972, is recognised as one of the leading experts in property in South Africa and holds many directorships in associated real estate and allied industries.
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Rate Cut Expected to Boost Property Market Recovery
Author: Lew Geffen Sotheby's International Realty | Published: July 25th, 2012
This month’s surprise repo rate cut by the Reserve Bank took the prime lending rate down to 8,5% - its lowest level in 39 years – and has of course been widely welcomed by the real estate industry as a confidence booster for consumers that will underpin the recovery of the housing market.
Adrian Goslett, CEO of RE/MAX of Southern Africa, says: “Since the reduction of the prime rate to 9% in November 2010, many consumers have been able to reduce their household debt and show more disposable income at the end of the month. This has resulted in more first-time buyers being able to enter the market than before, and now further increased affordability levels will drive up demand even more, which will impact on property pricing in the future.”
BetterBond CEO Rudi Botha says the rate cut will also enable many who previously fell short of the ability to qualify for a bond to now achieve their goal of buying their own home. The monthly repayment on a bond of R500 000 will now drop to about R4340 from R4499, and the qualifying monthly income for such a bond to around R14 467 from R14 997. “What is more, lower interest rates also mean lower monthly repayments on other debts such as vehicle financing and credit card balances, so consumers will have more disposable income to show when their ability to afford a home loan is being assessed.”
The interest rate cut comes at a time, notes Dr Andrew Golding, CE of Pam Golding Property, when consumers continue to feel the pressure of high and ever-increasing electricity costs, high fuel prices and increasing property rates.” Although banks have eased their lending criteria to some extent, the fact is aspirant homebuyers – including those wishing to relocate – are generally having to secure not only the costs associated with home ownership, such as transfer duty, bond costs and the like, but also in many instances a deposit of around 10 percent.
“And although interest rates are historically low, the days of many homebuyers being able to achieve mortgages at below prime rate are seemingly over, which adds to the burden on consumers to have good cash flows from an affordability perspective. We believe this further reduction in the interest rate will have a positive impact on the property market by providing a confidence boost in terms of sentiment, with cost savings, albeit modest, gradually filtering through into the market.”
Berry Everitt, MD of the Chas Everitt International property group says the rate cut should help to unlock what has become “something of a logjam” at the lower end of the market, where properties are on offer at excellent prices, but the ability of buyers to take advantage of these prices has been hampered by a lack of affordability.
He points out that it is also good news for existing homeowners, who will see a drop in their minimum monthly bond repayments “and, if they are wise, will use the additional cash to pay down their home loans more quickly. The minimum repayment on an R900 000 loan, for example, will drop from about R8100 a month to about R7800, and of the borrower continues to pay the additional R300 a month off the capital of his loan, he will stand to pay off the loan in 18 years instead of 20, and save more than R100 000 in interest.”
The most important immediate effect of the rate cut on the property market will be to reduce the number of homeowners who find themselves in such financial distress that they either default on their home loans or are forced to sell – and thereby to reduce the number of distressed properties coming on to the market and depressing property prices, says Jan Davel, MD of the RealNet estate agency group.
“In addition, of course, the lower home loan interest rate will make it easier for prospective buyers to qualify for home loans, so we can expect to see increased buying activity and faster absorption of the oversupply of stock in the market. In due course, this will result in prices beginning to show a distinct upward trend across the board.
“Sellers, however, would be well-advised not to raise their asking prices at this time, but rather to cultivate the possibility of greater interest in their properties and faster sales that will enable them to take advantage themselves of a lower interest rate when securing their next home loan.”
Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, says the rate cut will add impetus to an already reviving property market. ”The Reserve Bank has taken a bold step in the face of the upward pressure on inflation from rising service tariffs and food and fuel costs, but obviously balanced the risk against the need to stimulate economic growth and job creation – which will also be a positive for the real estate industry.
And most importantly, the rate cut will boost consumer confidence, which is vital for the continued recovery of the property market. It will provide quite substantial relief for those who are still carrying a heavy debt load, and enable them to feel that they are ‘getting ahead’ again financially, despite the gloomy predictions for the global economy. Consequently, we expect to see a significant increase in home buying activity in the next few months as the effects of the decrease filter through.”
However Seeff chairman Samuel Seeff is not so certain that this will be the case. ”We used to await the interest rate announcement with anticipation and it used to be the pre-eminent factor in determining sentiment in the market and drive demand or lack thereof. Where an interest rate cut would have encouraged more people to look around and we would almost immediately see more buyers at show days and more response to our advertisements, our experience over the past few years has however, been that, despite halving since 2008 to a level last seen in 1948, the low interest rate has not encouraged wholesale buying activity.
“Recovery, remains uncertain amid continued sluggish economic activity while consumers are by and large still struggling to reduce their household debt levels. South Africans are legitimately concerned about job security and economic growth and the general sentiment in the market is one of caution rather than opportunity.
“Having said this, however, we are experiencing the best buying conditions in decades and we believe those with the means to do so should buy now.”
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