South Africa : Lower interest rates to revitalise property market by 2010

Economists agree that as the global recession takes hold and economic growth comes under threat, interest rates are set to drop spurring a revival in South Africa's property market by early 2010, writes Michael Appel.

While the United States sub-prime mortgage collapse plunged the global economy into a liquidity crisis, South African banks, considered to be some of the most secure in the world, were hardly affected.

The National Credit Act (NCA) which came into effect on 1 June 2007 made getting a loan from any bank more difficult than in the past.

Giving credit to consumers who are not credit-worthy places banks at risk of not being able to finance debt because clients are unable to repay their loans.

An inflationary cycle beginning in June 2006 led to the South African Reserve Bank's Monetary Policy Committee (MPC) raising interest rates 10 times or a cumulative 5 percent until the repo rate was left unchanged at 12 percent in August 2008.

Thousands of South Africans, who had financially over-extended themselves by taking out too many bonds on existing properties, were unable to keep up with bond payments under the ever-increasing interest rate, forcing many to sell their properties instead.

Estate agent Irene Prinsloo, speaking to BuaNews on Wednesday, said: "Where the market is going to go in 2009 all depends on what is happening globally and what is going on politically in South Africa.

"With the introduction of the National Credit Act and high interest rates, loans have become hard to come by and people are already financially stretched - so buying property was not possible for many last year."

Ms Prinsloo explained that lending criteria at banks had changed and prospective buyers could no longer get 100 percent of the value of the home as a loan. Buyers are also now required to put down a deposit of between 10 and 15 percent of the value of the home before qualifying for a loan.

"Buyers who go through a particular bank and are not customers of that bank are then required to put down a deposit of 30 percent and they must pay the transfer and bond costs themselves," Ms Prinsloo highlighted.

For example, if a buyer wants to buy a house worth R1 million, the buyer must first put down a deposit of R300 000 and pay a transfer fee of about R65-70 000 before a bank will loan them the remainder of the money.

High interest rates, Ms Prinsloo said, has forced property owners to sell their properties at a much lower price than was initially sought. For example a house in Waterkloof Heights in Pretoria, Gauteng, was marketed for R2.7 million, but was eventually sold for R1.6 million.

And, where sellers in the past took about 5 to 10 percent off the price, they were now taking 20 to 30 percent off their original price.

"We are all hoping for a turnaround in 2009, and if interest rates come down, it will encourage consumers to invest in property again," Ms Prinsloo said.

Estate agent Johan Van Der Westhuizen, explained to BuaNews that the market was definitely a buyers market at the moment in which people are being forced to accept lower offers for their properties.

"We are, however, feeling positive about the fact that interest rates might come down. Our biggest problem is getting bank loans approved and its putting a damper on the market," Mr Van Der Westhuizen said.

The hope is that the market will start picking up from the middle of the year onwards, and people who have waited for the market to hit the bottom should probably buy now as it is unlikely to drop further, Mr Van Der Westhuizen said.

Nedbank chief economist Dennis Dykes told BuaNews that although the property market will be weak for most of 2009, it will start to pick up closer to 2010.

"The market is under pressure at the moment, but it should start picking up towards 2010 as there is always some lag in a drop in interest rates," Mr Dykes said.

Believing South Africa's property market has been quite resilient to global market turmoil, Sanlam economist Jac Laubscher said a drop in interest rates is likely to set the scene for greater interest in the property market again.

Mr Laubscher told BuaNews: "It seems as though we have hit the bottom of the market and with interest rate cuts, salary adjustments and wage increases, interest in property will spike again". - BuaNews