Interest rates not the defining factor in residential market

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It has come as a surprise to many property watchers that the low interest rates - the lowest in 30 years - currently available to South African borrowers have not stimulated the residential property market to a far greater degree than has, in fact, happened - but, says Lanice Steward, MD of Anne Porter Knight Frank

The Cape Peninsula estate agency, a look back at the housing market over the last 40 years shows that property tends to boom or lag in response to other factors just as much as it does to fluctuations in the interest rates:  rates, although important, are by no means always the determining factor.

In early 1999, said Steward, the rate was 22,0% and by the end of 2002/early 2003 it was still as high as 17%.  Nevertheless, it was at this time that the market took off.  

“By the end of 2003 the rate had dropped to 11,5%, but throughout the boom period it was always at 10,5% or higher.  These fairly high rates provided no really significant brake on sales.

“If this year or early next year the rate was to rise by 0,5% or 1%, we would still be at the third lowest level since 1979 when the rate was 9,5% - but we would still probably see a sluggish sales market.

“The reality, therefore, is that the market can flourish at high rates provided the economy is healthy.  When in 1998 the rate hit 25,5%, some homes continued to sell, although at a slower rate.”

Apart from general economic factors, are there any other determining factors that can trigger off a boom?

“All the evidence,” said Steward, “points to the availability of bonds being extremely important.  Right now, only 55% to 60% of applicants in South Africa are getting bonds and until this rate goes above 70% or 75% no real housing boom will be possible.”

Also significant, says Steward, is the cost of living.  At the moment the official inflation rate is 4,2%, but for monthly salary earners who eat three square meals a day, own cars and have homes with high electricity consumption and rates charges the real inflation rate is probably double the official rate, resulting in regular budget and cash problems.

If, however, the homeowner does have access to bond finance, now, with prices so low, says Steward, is a very good time to upscale.

“Accept the fact that in selling your existing you will get less than you would have in 2007 and 2008, but realise that in buying a new, larger home you will also be getting a heavily discounted price.”

Asked how greatly political factors are affecting today’s market, Steward said that the ANCYL statements (and an ambivalent stance on these from COSATU and the ANC) have created a higher level of uncertainty that has existed for some time.

“I do not want simply to repeat the Business Leadership SA statements, but it is absolutely true, as Michael Spicer said, that in the same way that nature abhors a vacuum so investors deplore uncertainty - and it has to be admitted that there is a now a significant uncertainty about which economic path South Africa will ultimately follow.”

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