'Cut won't fix house prices'

Johannesburg - The property sector has welcomed the South African Reserve Bank's decision to cut the repo rate by 100 basis points to 10.5%.

But experts have warned that an overnight recovery cannot be expected.

Herschel Jawitz, CEO of Jawitz Properties, cautioned that the rate cut does not yet signal the bottom of the property cycle.

"One only has to look at the US and UK residential markets where interest rates are at historic lows to realise that a recovery is still only on the horizon. The challenge is consumer confidence. As long as people are concerned about job security, making repayments and keeping their heads above water, confidence will remain low."

On the back of two rate drops, the cut is, however, a further stronger signal that inflation and the interest rate cycle of the last two years is turning. For a person with a bond of R1m, repayments will have come down by R1 000 per month since January, which is meaningful, said Jawitz.

But although interest rates were cut by 150 basis since December 2008, causing mortgage repayments to drop by 8.1%, repayments are still 24.6% higher than in June 2006 when the mortgage rate was at a level of 10.5%, said Jacques du Toit, Senior Property Analyst at Absa.

He expects the residential property market to bottom around mid-2009 and gradually recover in the second half of the year on the back of lower inflation and interest rates and somewhat better economic conditions.

"The housing market is expected to only show a noticeable improvement in 2010 and beyond."

A key problem is banks' approval of home loans. Jawitz said that the banks' tight lending criteria continued to be a significant challenge in the market. "Their lending criteria - as with banks overseas - seem to be independent of lower interest rates."

Dr Andrew Golding, chief executive of the Pam Golding property group, agreed.

"While the reduction in the interest rate will improve the affordability for those seeking to purchase their own home, we hope that the repo rate decision will also encourage banks to relax their more stringent lending criteria and to take a more balanced and considered view towards making mortgage finance available to the residential property market," said Golding.

Brian Falconer, CEO of Colliers Residential, said the fact that banks and other mortgage originators have been more hesitant to approve bonds is not in itself a bad thing.

"But our financial sector is systemically sound, unlike many overseas, and as market pressures start to ease we should see a similar easing in bond approval."

Jawitz added that there are great buying opportunities to be had at all price levels across the country.

With real prices now at 2007 levels, there is value - but not bargains - across the board, he said If rates continue to fall in 2009, those opportunities will not be around indefinitely. "Time the market at your own peril."

- Fin24.com