Rate cut won't lift building yet

Johannesburg - Analysts warn that Thursday's rate cut may not provide the private building sector with the immediate boost it's looking for.

On Thursday, South African Reserve Bank (Sarb) governor Tito Mboweni announced a 100 basis point cut in rates, bringing the prime overdraft lending rate to 12%. Since December 2008, lending rates have fallen by 350 basis points.

Standard Bank economist Danelee van Dyk expects rates to be reduced by another 150 basis points by mid-2009.

"Ultimately, interest rate cuts will be a help for building activity in the private sector, but the lead times are long," Credit Suisse Securities analyst Marc Ter Mors told Fin24.com.

BoE fund manager Leith Wimble said it is "probably too soon" to expect a significant improvement in residential building activity. "The first half of 2010 is probably a more realistic expectation. The real economy is still under severe strain."

Ter Mors agreed, saying the number of building plans passed would need 12 to 18 months to pick up: "And we haven't yet seen a recovery in building plans passed. In fact, a recent BER (Bureau of Economic Research) study reported that architectural plans awarded were down more than 50% year-on-year in the fourth quarter of 2008 and were expected to decline further in the first quarter of 2009."

Another analyst, Vega's François du Plessis, added to Ter Mors' comments: "Cement sales are still under pressure, and there is still an overhang of office space and townhouses.

"The banks' residential property barometers are still in the doldrums. Homeowners' balance sheets will take a long time to recover - banks are ruthlessly turning applications for credit down."

Ter Mors said: "With interest rates coming down, customers will first repay their debts before building. The recovery will be there, but it will only be later."

Consumers were hit hard in 2008 as inflation and high interest rates drained their disposable income. In October 2008, growing concerns over liquidity caused further pain as the lending appetite started to dry up. This, in turn, hit stocks on the South African bourse.

So far, 2009 has started to paint a slightly rosier picture. According to Wimble, one of the big differences between the fourth quarter of 2008 and now is the improvement in risk appetite. "The market is not going lower in response to bad news, which is a good sign that the worst may be behind us."

- Fin24.com