Rate cut: banks must chip in

Johannesburg - Interest rates are at their lowest level since October 2006, but unless financial institutions change their approach to lending, the property market will not begin its long anticipated recovery.

This is the word from Allister Long, MD of Powerhouse Financial Solutions, South Africa's leading property buyer's agent. He was responding to the latest interest rate cut, as announced by the monetary policy committee of the South African Reserve Bank. The 100 basis points cut takes the prime rate down to 12%.

"The last time interest rates were as low as 12%, was nearly three years ago," says Long.

"But the market has changed dramatically since then, with a credit squeeze constricting property sales and purchases. A lot of the nervousness on the bank's part in terms of extending credit stems from the risks associated with the National Credit Act. Just a couple of years ago, credit was easy to obtain, and banks and other financial services institutions were keen to provide as much finance as possible.

"Now, given the state of world markets and the credit squeeze, a 12% prime rate presents an insurmountable barrier for many. If the status quo prevails, the property market will remain moribund, and many people who wish to enter the market will not be able to do so."

The monetary policy committee of the South African Reserve Bank has decided to reduce the repo rate by 100 basis points, the fourth in succession. This takes the prime rate down from 15.5%, where it stood in June last year, to 12%.

These rate cuts have been made in an attempt to ward off the worst effects of the global recession, and indications are that the remedial actions by the Reserve Bank have played a significant part in protecting the economy. However, says Long, the time has come for financial services organisations to do their bit in stimulating the market now.

"We understand that these companies are wary of extending credit and are risk-averse," says Long, "but we call on them to play their part in kick-starting the economy. The banks, in particular, are vital in regulating and ensuring the economy's overall health, and now more than ever they must step up to the plate."

- I-Net Bridge