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Impact Of Rate Hike Warning
From Property24
30 June 2006
Reserve Bank Governor Tito Mboweni last weekend warned of possible further interest rate increases on the heels of the recent half a percentage point increase. Samuel Seeff commented this week on the possible impacts of such warnings on the property market.
"I think that what will happen now is that the market will cool down slightly, and until such time as people are more assured of where the interest rates are going, and there is less rand volatility, buyers are going to be more picky. My advice to sellers who are wanting to sell is that they should be particularly receptive to the advice they receive from agents as to what is market value in their area – because overvalued properties are not going to sell in this market. There are buyers out there, and transactions are still and will still be happening, but they will be at what is considered to be market value, and not at over-inflated prices.
"Clearly, the weaker the rand gets, the greater the potential for inflation to creep in and for further interest rate increases. Certainly we have already had the half a percent increase, and Governor Mboweni came out quite strongly last weekend saying that because of the current deficit, there is a likelihood of further interest rate increases. The ramifications of this are as I outline above - the market will cool off slightly, and only those properties which are well valued will in fact transact.
"Higher interest rates automatically result in buyer resistance because of greater repayments. The question is, how much are interest rates going to increase, and how much expectation is there that they are going to increase? Should they not increase that much, but the expectation is there that they will do so, there will be a short-term hiatus where buyers will sit back and wait and see for a while. Further interest rate increases will result in a greater slowdown in the real estate market, but not necessarily any reduction in actual prices achieved. This is a very significant point – some people are expecting prices to come down immediately – but they may not in fact do so. While certainly the market will be slower, if sellers can continue to hold on in a higher interest rate environment, prices won't come down.
"The fact remains that overall, the fundamentals of our economy are still strong – there continues to be growth in the GDP as well as in government spending in the run-up to 2010. This is going to be a big driver in building the economy - and consequently people will continue investing in property.
"The other side of the coin is that the further our currency weakens, it invites more foreigners to come in to the South African market and buy here. Their perception is that value will be even better, and they might well be in a position to enter the market when they otherwise might not have done so."
Original articles published at www.property24.com.
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