- Over the past few months, the property industry has experienced a slow-down compared to the same period last year and even during the first few months of this year.
- The main reasons for the slow down is the introduction of the new National Credit Act (NCA) in June 2007, the usual seasonal slow-down during the winter months and a total interest rate hike of 350 basis points since the middle of 2006.
- Although there was a mild recovery during July and August 2007, which could be attributed to the market players’ efforts to adopt to the new rules set by the NCA, the steadily increase in interest rate probably had the biggest impact on the slowing down of the property market over the past few months.
- The Reserve Bank made it quite clear that they will continue to increase the interest rates as an instrument to keep rising inflation under control. According to many economists, this might mean as much as 3 more interest hikes of 50 basis points in the near future. The upside of this strategy of the Reserve Bank is that the interest rate is measured against the current inflation rate and not the exchange rate as before. This means that it is unlikely that the interest rate will reach the 20% level as it had a few years ago.
- The rising interest rates had a particular negative impact on the first-time buyers market as well as those home owners who were already stretched to afford their monthly bond installments.
- Mortgage originators should advise first-time home buyers that interest rates are likely to rise again in the near future and that they should not over-commit on their first purchase. They will also be well advised to buy smaller, more affordable houses in areas with higher capital growth projections in order to accumulate wealth and to gradually work their way up in the property market.
- Gavin Opperman, ABSA Home Loans Managing Executive, expects that, although less 5 % of South Africa’s total mortgage loans have fixed rate terms, more people will opt for a fixed rate in order to protect them against further rate hikes. Mortgage Originators should also take note of the significant improvement in fixed interest rates offered by the banks when advising first time home buyers and those already under pressure to afford their home loans.
- In recent years, the market experienced a massive growth in the buy-to-let market. However, the continues slow down in the capital growth of properties in 2007, the over supply of rental properties in recent times that pushed rental prices down as well as the interest rate hikes, have put more pressure on those individual with more than one bond to pay. Given the new fixed rate options, those individuals might also be well advised to look at fixed rate bonds.
- However, it is not all doom and gloom. Two major factors that also drive the property market, is our GDP that consistently stays above 5%, and also the population growth. According to some, we have also only seen the tip of the so called “black diamond” generation entering the property market.
- Further to that, ABSAs house price index forecasts property growth over the next year at approximately 10%. Although it is much less than what we have become accustomed to over recent years, the property market still remains a good investment.
- Looking at recent publications on the forecast of the local property market, many economists remain positive on the prospects of a turn for the better in the second half of 2008.
By Theuns Hanekom - CEO SAMO
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