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Issue 13
Bond Talk
Intellectual Mortgage Market News - June 2009
INTEREST RATES…WHERE TO FROM HERE…UP
or DOWN?
And… DOES IT REALLY MATTER!!
Other articles in this newsletter reflect on the merits of the
latest decision to leave rates unchanged, this article ponders
on the importance of interest rates in relation to the Banks
lending policies.
Have we reached the end of the current cycle of rate
reductions or are there more to come? General consensus
is that there will, at best be another two 0.50% reductions by
the end of 2009 meaning a prime rate of 10%.
These may very well be the last cuts; the indications are that
rates will start to climb slightly in the second half of 2010.
But do interest rate reductions at this time really matter to the
Estate Agent selling a property or to an Originator obtaining
a home loan on that sale?
The short answer is NO, except from making repayments
more affordable; rate reductions make little difference
as long as the Banks continue to apply their current tight
lending policies.
Whether the interest rate is 10% or 16% is irrelevant if the
Banks are not prepared to advance home loans as in the
past. In fact, be prepared for home loans being granted at
an interest rate of prime plus.
Cash deposits are here to stay, 100% bonds are a thing of
the past, except for the so called affordable mass market
and/or the supply of acceptable collateral security.
Whilst Banks remain reluctant to extend credit, the property
sector cannot recover from its current weak position. An
oversupply of sellers and an under supply of qualified
purchasers may continue well into 2010.
An old saying goes that “the Bank gives an umbrella
when the sun is shining and then takes it away when
it starts to rain” is most certainly applicable today. We are
currently caught in the middle of a downpour with not an
umbrella to be found anywhere.
Only an easing of Banks lending policies can lift the
market to higher levels, not interest rates.
Regards
JOHN SMYTH
Banks, analysts slam mboweni decision
Cost of borrowing is still too high, though some say
banks are to blame. Property experts assess decision
to leave interest rates on hold. The Monetary Policy
Committee (MPC) on Thursday announced that repo
rate will remain unchanged at 7.5% while prime rate
stays at 11%.
“Reserve Bank Governor, Tito Mboweni warned consumers
last month that he did not expect further significant rate cuts.
Nevertheless, many were pinning their hopes on another chop.
Only two of 26 economists polled by Reuters last week expected
the no change decision, with 24 predicting a 50 basis point drop.
The decision to not cut interest rates is disappointing and does not
help an already heavily-indebted household sector still struggling
with debt repayments, said Luthando Vutula, managing executive
of Absa Home Loans.
“A further cut in interest rates would have implied that mortgage
repayments would have dropped by 26.3% since December last
year when the mortgage rate was still 15.5%,” he said.
The monthly repayment on a R500 000 mortgage loan over a 20year term would have dropped by another R169 if there was a 50
basis interest rate cut. This would have been implied a cumulative
saving of R1 778 on a R500 000 mortgage loan since December
last year.
Vutula said that the economy is expected to remain under a lot of
pressure until late this year which will continue to impact employment,
household income and the property market.
He urged consumers to keep expenses under control and look for
properties that are affordable, taking account of their financial
position.
For property investors, this is bad news because the cost of borrowing
is still high and banks are strict on lending in this current economy,
said Jan van Staden, chief executive officer of Barnard Jacobs Mellet
(BJM) Private Client Services.
Speaking to Realestateweb.co.za following the MPC announcement,
Van Staden said the cost of capital for buyers is still high. And,
there is a lot of property supply in the market met with unbalanced
demand levels and buyers battling to secure finance.
On the other hand, he said, South African investors could consider
listed property, which is still faring better compared to residential.
The expectation was a 50 basis point cut in interest rates and this
would have improved market sentiment and brought more buyers
into the market.
Kundayi Munzara, a research analyst at Investec Property, said the
latest decision to keep the repo rate unchanged may have a slightly
negative effect on property investors who had anticipated lower
interest rates in their net cash flow projections for the remainder
of the year.
The higher-than-xpected interest rates may lead marginal tenants
suffering operational strain to vacate occupied space. In the listed
property space, explained Munzara, fundamentals continue to
weaken as shown by slightly higher vacancies and bad debts.
“For investors, we expect a real recovery in the property market
once banks reduce funding requirements which have become more
onerous over the last six months,” said Munzara.
For residential property buyers and sellers, this is indeed depressing
news. This, along with an increase in electricity costs announced
earlier on Thursday, has made the situation worse for the residential
market.
Trevor Richter, CEO of Richter Properties, said 0,5% cut would have
stimulated activity in the residential property market.
But, others disagree and say another cut would not have been a
boost to the real estate market.
A 50 basis point was never going to stimulate further activity in
the residential property market, because affordability is a major
obstacle for buyers, said Kura Chihota, executive director of
Leapfrog Properties.
cut further as this would have further eased bond repayments.
André Venter, spokesperson of United Association of South Africa
(UASA - for trade unions), said home owners were pinning their
hopes on a drop in interest rates for relief, many on the brink of
losing their homes as it has become impossible to make monthly
bond repayments.
Would-be buyers will have to continue renting as banks are still not
lending money. The decision by Nersa to grant Eskom a tariff hike
of 31.3% will make it even difficult for home owners and many are
likely to lose their homes, said Venter.
The Reserve Bank has missed an opportunity to help stimulate the
economy by leaving the repo rate unchanged, was his view.
According to Brian Falconer, managing director of Colliers
Residential, leaving the repo rate unchanged will mean no relief for
the economy.
Since December, the Reserve Bank has cut the repo rate by 450
basis points, from a high of 12% to its current level of 7,5%. The
Reserve Bank has indicated that we are nearing or at the end of the
2009 rate-cutting cycle.
Banks remain reluctant to extend credit, which is hampering the
property sector, the petrol price is set to increase and this is all
generally impacting negatively on the country’s economy, he
added.
article courtesy www.realestateweb.co.za
However, it would have ensured activity remains in a holding
pattern. In light of this, the rental market is expected to continue to
grow strongly as it is more affordable to rent a R1m property than
own it.
Trade Unions have also expressed disappointment and concern
saying that home owners would have benefited from another rate
Eskom hike ‘unacceptable’
Johannesburg - Trade union Cosatu has said the 31.3%
electricity tariff hike granted to power utility Eskom is
“totally unacceptable” and unwarranted as it is almost
four times the inflation rate.
“Cosatu strongly condemns this hike; it is a face-saving measure
by Nersa (the National Energy Regulator of SA) to show it is
independent,” Cosatu spokesperson Patrick Craven told Fin24.
com after the announcement on Thursday. “It’s going to affect the
poor the most.”
Craven said the union will use Nedlac structures to argue for a
special tax “on the rich” to pay for Eskom’s infrastructure investment.
“The tariff hike will have a negative impact on inflation and will
no doubt make the recession worse, as small businesses cannot
afford it,” said Craven.
Brait economist Colin Garrow agreed that with the power price
hike inflation is “not going to come down fast”.
He said: “The electricity tariff hike goes straight to the inflation
basket. Electricity is one of those administered prices that will
weigh against the inflation outlook.
“Beyond today [Thursday’s interest rate announcement], the
appetite to cut interest rates will be weaker.”
The rate hike will take away consumers’ buying power and delay
a recovery in expenditure, said Monale Ratsoma, economist at
Thebe Securities.
“You are dealing with households that are already under pressure,
and then you add another burden on already tight budgets. That is
where the pain is.” Ratsoma said the hike will contribute to a delay
in economic recovery as job losses are still expected to rise.
Eskom had applied for 34% hike to fund a R385bn capital
expenditure for electricity generation.
article courtesy www.fin24.com