2 June 2009

South Africa: Recession Negates Effect of Rate Cuts on Home Property Market

Johannesburg — FNB property strategist John Loos yesterday said that selling due to financial pressure was a key driver of supply.

Last month's decline in house prices represented a deterioration on the revised 9,2% rate of year-on-year decline recorded in April. Month on month, the rate of deflation was 3% last month .

"With SA officially now in recession, conditions in the economy are hampering the pace of residential demand growth despite a series of interest rate cuts having already taken place," Loos said.

The downward trend in interest rates, which were now at 2006 levels, was expected to have a muted effect on the property market as a result of economic challenges.

The Reserve Bank's latest decision to further cut interest rates by one percentage point, reducing the Bank's prime lending rates from 12% to 11%, brings the total interest rate reduction since December to 4,5 percentage points.

Loos said the interest rate cuts should bring "some" stimulus to a credit-sensitive market such as the residential property market.

However, he said unlike the 2003 aggressive interest rate cut which took place in good global and local economic times, the current stimulus from interest rates was to a great extent offset by an economic recession, which contained growth in household purchasing power.

"As such, the expectation of nothing more than a very mild improvement in residential demand during 2009 continues, and with oversupplies still believed to exist on the market, house price deflation is expected to be with us for most of this year."

However, Loos said the worst year-on-year price deflation would show in the figures around mid-year, and that during the second half of the year the market would begin to see the rate of decline subsiding.

"At the most recent Bank interest rate meeting, the governor did begin to prepare the market for a possible pause in interest rate cutting, so although all future interest rate decisions depend on how future economic events unfold, we should not expect too much in the way of interest rate cutting from here ," he said.

The good news for households is that debt repayments are declining further due to lower interest rates.

In response to the Reserve Bank's latest cut, commercial banks reduced their lending rates to the public by the same magnitude to 11%.

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