2009/01/22

The South African Reserve Bank should take the bold step of reducing the repo rate by a full 100 basis points next month when its Monetary Policy Committee meets.

This is the call from Brian Falconer, MD of JSE-listed Colliers International's residential division, who adds that "we have reached the end of the interest rate hike cycle, with the first rate cut late last year".

"If the Reserve Bank were to cut the interest rates by 100 basis points when it meets on 11 February, it would have the effect of stimulating the market for home buyers. It would represent the best news in years for home buyers."

If the Reserve Bank does cut interest rates by 100 basis points in February, it will mean a drop of nearly R1k per month in bond repayments per Rim bond held, adds Falconer.

South Africa has undergone a two-year cycle of rising interest rates which have put homeowners under significant pressure. The repo rate, the rate at which the Reserve Bank lends money to commercial banks, peaked at 12% in August before finally being cut by 50 basis points in December. It is now 11,5%, with prime at 15%.

"The near halving of the petrol price and the sharp drop in inflation, except for food inflation, have given the bank all the reasons it needs to make meaningful inroads into the interest rate," says Falconer.

"Other countries in developing markets, such as Australia and Thailand, have been aggressive in cutting interest rates, and right now it would be the best possible move for the local economy.

"It would also slow down the destructive cycle of bank repossessions and encourage more people to enter the property market," notes Falconer.

"By the end of last year, some 5% of homeowners were in a negative equity position, and around 130,000 homeowners were in significant trouble with their bonds. For each 50-basis point cut people's mortgage stress will ease."

Many economists are forecasting cuts totaling 250 to 300 basis points during the course of 2009.

As interest rates decline, so banks should also begin to loosen their credit purse strings: currently banks are requiring up to 20% deposit before granting a bond, which prices many people out of the market.

Overall, the residential property market is on its way to a slow recovery, Falconer reports.

"After a difficult 2008, home sellers, home buyers and estate agents have more to look forward to," says Falconer.

"All indications are that the market is bottoming out, and we are on the way back to something resembling normality."

Property prices continue to decline, good news for home buyers. FNB Home Loans has reported that house prices declined 1,7% in December after a 4% decline. However, for the whole of 2008, average house prices still rose 5,2%, as against the 29,5% increase recorded in 2004, the highest in recent decades.

South Africa has been spared the worst excesses of the global property crunch, adds Falconer.

"While we cannot claim to be unaffected by the subprime crisis as it has unfolded in the US, we did not get hit as hard, and our recovery will not be as slow as that of the US property market."