Experts agree that the the latest interest rate hike will suppress residential property sales, but they differ on the effect it will have on rentals.

This month's interest rate increase of 50 basis points (0,5 per cent) would further trim the already shrinking volume of residential property sales, although this impact would again be cushioned if sellers lower their expectations on asking prices to effectively absorb the cost.

More important to Jeanne van Jaarsveldt, marketing and finance director of RE/MAX of Southern Africa, is the effect the hike will have on residential rentals as he has little doubt that the rise will be flashed onto tenants, by ways of increased rental fees.

He believes the lower end of the city's rental markets is already reaching a crisis level. "Stock is there, but because of the surge in numbers of failed credit checks landlords are insisting on double deposits to safeguard their investments and higher rentals to offset higher mortgage repayments."

The seven interest rate increases in a period of less than two years had also flattened landlord's ability to negotiate on rentals, which was one of the traditional safeguards offered them in a rising interest rate scenario. "Worse still, the current grimness of the rental market will only intensify with the full impact of the new municipal rates structures, which once again will be inevitably passed onto tenants.

A solution in part, and one that Van Jaarsveldt views as imperative, is for real-estate stakeholders to create through incentives a developer friendly environment to create specifically built rental stock. This would free up the situation, while at the same time boost job opportunity and introduce some level of stability into the rental market.

John Loos, FNB home loans property strategist, concurs that the rate hike is negative from a residential property market performance point of view and but that the rental market stands to gain from it.

"Whereas we expected rates to move sideways for the entire 2008, a scenario which I believe would have led to a gradual recovery residential demand as from mid-year, such a recovery has in all probability been delayed considerably. It will take substantially longer for household confidence to start recovering."

"I believe that in the current environment of uncertainty and negativity the resumption of rate hiking will be an additional boost for rental demand," Loos says.

Property24 2008/04/13