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Don't rush into property on the back of predictions
Although a cut in interest rates is on the cards, it does not signify a property boom, writes LUCIENNE FILD
IF YOU'RE thinking of buying property should you get into the market now - so as not to miss out on the current low property prices - or is there still plenty of time before prices start ticking up again? While predictions of a drop in interest rates are welcome news to most, they're making potential home buyers edgy. A drop in the bank interest rate will undoubtedly boost the property market - the question is when and by how much. Lower interest rates make property more affordable. Affordability increases the demand for property, and with greater demand, prices rise. Neville Berkowitz, a property economist in Gauteng, says a 1% or 2% drop in the interest rate will not make a huge difference. What's needed to boost the property market, he says, is a drop of 3% or 4%. A 1% drop in the interest rate will, however, have a more immediate impact on the lower level of the market (homes of R75 000 to R150 000).
"The property market has been bumbling along for so long because of the high interest rates and a lack of confidence on the part of home buyers in most parts of the country. By contrast, the Cape Town market has been booming - because buyers are confident." Berkowitz believes a drop in the interest rate would, to a degree, rehabilitate confidence which has been destroyed largely by high crime.
But a fall in the rate would not have an instant effect on the property market. "If interest rates drop and are sustained at that lower level, the positive effect on the market will only be felt three months later." Once rates drop, explains Berkowitz, the banks first have to adjust their mortgage bond rates, and then people's financial situations must be given a chance to improve. Secure homes situated in a complex are more likely to benefit than free-standing homes, he says, because of the high demand for security. On whether you should buy now or wait, Berkowitz's advice is that it's wiser to wait: "Ask yourself whether you can afford to buy a home at the current interest rates. Don't buy now thinking you can afford the house once interest rates drop. Don't buy on anticipation. And remember, there is no shortage of stock." Erwin Rode, a Cape-based property economist, says a 1% drop would represent nothing more than a gesture by the Reserve Bank - and would not have much impact on the property market. Rode does not expect the economy to accelerate and interest rates to drop significantly before the middle of next year. But once rates are much lower, the upper levels of the property market (homes valued at R400 000 and up) would react first. Less expensive houses, he says, are slower to react and usually lag six to 12 months behind. "People who buy more expensive homes usually own businesses and benefit quicker when the economy accelerates and interest rates drop. "Those who buy cheaper homes usually earn a salary - and salary increases are not prompted by improvements in the economy." Rode's advice to potential home buyers is not to rush into buying on the announcement of a 1% drop in rates - as this will not signal the beginning of a property boom. Rode is convinced the market will not pick up before later next year. Jacques du Toit, an economist at Absa, says the residential property market reached its low in the third quarter of last year - and it's unlikely to change before next year. Du Toit expects a 1% drop in the interest rate only in the first quarter of next year, with a similar cut possible in the third quarter. As a result, the property market is unlikely to pick up before later next year, he says. Trevor Olivier, general manager of savings and loans at NBS Bank, says you should only be buying property if you can really afford it. And there are not just the bond repayments to consider in your calculations. There are other costs such as rates, taxes, and general home maintenance. "No matter which income category you fall into, buying a home is probably the single biggest investment you can make, so it's essential to know exactly what you are doing," advises Olivier.
Olivier is more optimistic on interest rates and says the first cut could come before the end of the year. "The market has not been active and house prices have been fairly stagnant, but a reduction in interest rates could be the trigger which could start to boost house prices," he says. Richard Rom of Powerhouse, a consultancy to property buyers, says it will take more than a 1% or 2% drop in the interest rate to boost the market, and so potential buyers have enough time to shop around. "Consumers easily swallow three rate increases in a row, but come the prospect of a 1% decrease, they go overboard, expect a property boom and start celebrating."
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