Don't get too excited by repo relief
The SA Reserve Bank Monetary Policy Committee's (MPC) decision to reduce its policy repo rate by 50 basis points should imply a drop in prime rate from 15.5% to 15%. This would mean a decline in a prime rate instalment repayment (monthly compounded) of R185 per month on a R500,000 - 20 year bond, and R371 reduction on a R1 million bond.
This, on its own, offers little financial relief to the hard-pressed household sector, but it is believed to be only the start of a series of interest rate reductions that Firstrand expects to end in interest rates being in the region of 3.5 percentage points lower at 12% prime.
On top of the expected series of interest rate cuts, household sector debt-to-disposable income ratio is expected to continue its declining trend until well-into 2010, as growth in household sector credit outstanding continues to be lower than disposable income growth for some time. This leads to the projection of a declining household debt-service ratio (cost of servicing the household debt burden as a percentage of GDP) through 2009. This ratio is a good predictor of default rates on residential mortgage loans, and as such we could well see a decline in default rates beginning at a stage in 2009.
Implications for property
An expected rate cutting trend is expected to lead to a gradual improvement in residential demand as 2009 progresses, which would feed through into growth in demand for new mortgage loans off a now very low base. However, the emphasis is on gradual, as the country still has to get through a period of very slow economic growth and job loss, which is expected to partly offset the stimulus of lower interest rates.
As for house prices, they are only expected to show some recovery near to 2010, delayed by the existence of something of an oversupply on the market which could take some time to be mopped up by improving demand. Average house price deflation of 3%-5% is thus still expected for 2009 as a whole.
Proceed with caution
It would be advisable for the household sector to take note of the high risks that still exist when making borrowing decisions. While inflation and interest rate risks have subsided, the global economy and financial sector is undergoing troubled times, and one doesn't know for sure how bad it can still get. Weak global growth has already impacted greatly on commodity prices (negative for our mining exports) as well as on our manufacturing sector. Resultant job losses already appear to be a reality as a result of this weak economic situation, and such global factors do filter through in varying degrees to other non-export-related sectors. Household job security can thus probably be said to have weakened in recent times, and this in turn brings cash flow risks.
Now is therefore probably not the time to “open the borrowing taps too quickly”.
