It may have come as a surprise to many economists, but the recent interest rate increase a wise move – at least I think so. The market has enjoyed nearly 2 years of steady recovery, and sometimes it’s easy to lose touch with reality.
The reality is that many world economies are still in a shambles, and whilst there has been some recovery in certain markets, most of the underlying causes of the recent crisis are still there.
So the recent 0.5% increase sends a message to consumers: Watch your spending and count the cost! This may be the first of a few interest rate increases this year, so be sure to factor this into your budgeting.
Banks have anticipated increases for a while now, and most were predicting increases last year. In fact, when qualifying a purchaser for home loan finance most banks factor in a 2% increase in interest rates – thereby ensuring you are not overextending yourself should the Prime rate increase.
Purchasers would do wise to take the same approach. Most analysts predict the Rand will continue to weaken, along with most other emerging market currencies. The strikes in the gold and platinum mining sector do nothing to instill business confidence and investment in our economy. And increasing petrol prices mean that inflation rate will increase. All these make it difficult for interest rates to stay at these levels for long.
For those of us who can remember the increases in 1997 I’m sure we’d all prefer some early increases now, rather than some drastic Prime rate increases later. If these increases are small then there should not be a massive impact on the ability of a property owner to service their bond.
However, if the economy worsens and there are large increases in interest rates, we could expect to see more bad debt, and an increase in bank repossessions and distressed sales – which isn’t good for the property market.
The positive news is that stock levels of property for sale have continued to decline, whilst buyer numbers have shown a steady increase. This means that supply and demand levels are close to leveling out. We’ve seen a steady increase in property values in the Helderberg Basin of 7-9% for 2013, and we can expect the same this year, provided there are no drastic interest rate increases.
If rates increase significantly this will mean purchasers qualify for smaller mortgage bonds, and have to purchase for less. Increased stock levels will slow down the increase in property values.
The message? Property is a good investment. Banks still have an appetite for home finance. However it would be wise to budget for a few more small increases in the interest rate and to be careful not to overextend yourself.
That way there will be no nasty surprises and, if interest rates don’t increase, you should have some extra disposable income to save for a rainy day.
Principal of Harcourts Platinum
Director of Harcourts South Africa