Last rate hike was premature 07 February 2008
Those who interpreted his recent remarks in the press to the effect that further interest rate rises appear to be inevitable, as support for such moves, are way off the mark.
So says Tony Clarke, MD of Rawson Properties.
"I believe that the last rise was put through prematurely, i.e. before the previous rise had time to take effect," says Clarke.
"Our experience in property marketing has been that interest rate rises take half a year to exert their full influence - and I am told that it is much the same in other sectors.
Clarke says that he and others in property selling are now concerned that further rises this year will shackle the economy and hit the house market hard.
"Many of South Africa's economists have recently pointed out that rising inflation, which the government is so desperately trying to curb, reflects the current oil and food prices and the exchange rate situation rather than excessive spending by the man-in-the-street. In our view, it is therefore counterproductive to rein in consumer spending (and job creation) as a means of controlling the effects of factors over which the consumer has no control. Perhaps we should just accept the 7% or 8% inflation rate. We need, after all, to support our growing economy."
The general public's debt, he adds, has risen in two years from 61% to 77% of their disposable income and this trend made it essential to introduce the more stringent bank credit policies of the National Credit Act (NCA).
"The change in the economic environment has very definitely been felt in the property industry: we have experienced a considerable slowdown in the investors' market and the sales of coastal property (i.e. holiday homes/secondary homes) as a result of the public being forced to cut down on spending.
Clarke says that the higher interest rates would be most acutely felt in the lower sectors of the market where buyers are usually 90% or 100% bonded and where they struggle to meet their payments.
This, he says, could lead to the large pool of potential buyers here once again opting to rent and thereby missing out on the wealth creation and consequent stability that property ownership imparts.
"This would be a great pity and I believe the government should take steps to avoid this happening," says Clarke.
"The message we have to put out, is two-pronged. First, at all costs do not give up on home ownership ? it's the best investment you can make. Secondly, if you budget correctly it's still possible for most salary earners to own a home despite the eroding effects of the 8% inflation rate, higher interest rates, and the new National Credit Act (NCA)."
Clarke gave seven tips to existing and potential home owners now struggling to find enough money to afford a home in today's tough economic conditions.
These are:
- Set aside an amount each month for saving or extra payments on your bond i.e. before you pay other debts.
- Make a determined effort to eliminate current debts. Cut back as much as you can on HP and Credit Card debt. Try to limit yourself to one card and keep well within your maximum credit allowance.
- Cut back on entertainment, holiday, sports goods, clothing, motor vehicle and other luxury but non-essential payments.
- Do not abandon your retirement annuity (RA), insurance and medical aid payments. These could be more expensive in 2008, but the day will come when you will need them ? and the tax savings on RAs are significant. Those who issue these policies, says Clarke, are usually less vigilant in chasing up forfeiting payments than other creditors, with the result that it is all too easy to let these payments lapse.
- Maintain your home well. If you do not, neglected current small problems will become big, expensive problems.
- Buy your household food in bulk at a discount, using coupons where possible.
- Finally, save your small change every day ? it is surprising how it will mount up.
Reverting to the possibility of making savings by extra bond repayments, Clarke says that one extra monthly payment per annum, will make it possible to pay off a 30-year loan in 21 years. And two extra monthly payments per annum, will cut the bond period to almost 15 years.
"Taking all these factors into consideration, it is clear that we are now looking at a year in which property will be more difficult to sell and will increase in value at a slower pace. Sellers will, therefore, have to settle for realistic market-related offers on their properties."
He predicts that the current economic cycle will last between 18 to 24 months and that the NCA will continue to impact on the market, with consumers forced to adjust their spending habits to be able to afford property. "Sellers will have to accept more realistic prices, because there will be fewer buyers and their offers will be more conservative."
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