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Houses should not expect further help from Reserve Bank

24-02-2011

No help for the ailing house market can, for now, be expected from lower interest rates.
 

 

The fundamental weakness in the housing market is currently being shown up by the sharp deceleration in the growth of house prices. After peaking at about 14% in April 2010, the yearly growth has since then been losing its momentum, and in January prices were, on a national basis, down by roughly 1% when compared to the same month a year earlier. This is according to the Absa house-price indices.

But, can any help be expected in the form of lower interest rates?
 

 

Given the hefty sales by foreigners of South African gilts over recent months (see graph); it comes as no surprise that the rand exchange rate has also softened. Without the buffer of a strong currency, the sharply rising oil and international food prices could now spell upward pressure — from a cost-push perspective — on domestic inflation.

The most likely outcome: a reluctance from the Reserve Bank to lower lending rates further. As a matter of fact, at its last meeting, the Monetary Policy Committee decided to keep interest rates steady at 5,5%, stating that its monetary policy stance is “expected to remain relatively stable for some time”. Thus, expect more downward pressure on house prices in light of the following factors:

• The likelihood of no more relief from lower borrowing costs
• Borrowing requirements remaining tight (the National Credit Act and commonsense prudency);
• Job uncertainty in the lower echelons
• The high indebtedness of consumers
• Rising inflation in general through rising electricity tariffs, toll charges, school fees, property taxes, food prices, fuel prices, a weakening rand exchange rate, and so on.

Unsustainable high wage and salary increases will partially offset these factors, but in our opinion this will not tip the negatives.

For more information, please contact John Lottering on 021 946 2480.