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Why a stable, low interest rate isn’t enough

The property market welcomes the Reserve Bank’s decision to keep the interest rate at its current level of 5%  and Jan le Roux, CEO of Leapfrog Property Group, believes that it’s time to look at other contributing factors to the current, less buoyant market.

Firstly the question has to be asked whether the market really is as slow as it appears. John Loos, Household Sector and Property Strategist at FNB Home Loans, makes a valid point when he indicates  that the market could be seen to be in bad shape when compared to the previous, unprecedented boom period. That does not mean that it’s so sluggish when compared to other, more “normal” phases.
However, even though the market might not be in too poor a condition, and probably won’t reach the highs seen a few years ago for some time to come, it doesn’t mean there isn’t room for improvement. So, what can be done?

John Loos believes that the SARB has “given over enough in terms of lowering the cost of household debt and stimulating the housing market”.  Le Roux agrees, “I concur with Loos that we that should stop looking to the Reserve Bank and further reductions in the repo rate to revitalise the property market - solutions must be sought elsewhere.  We are enjoying the lowest interest rates in years”.

Factors that are impeding improvement as listed by Loos include, but are not limited to, housing affordability, home loan procurement, municipal rates, the debt-to-income ratio and low household savings.

A lot has been said about the banks’ stringent lending criteria. “Much as I think that the mortgage lenders can still relax their lending measures somewhat since only about 50% of home loan applications are approved at present there is still some leeway in terms of softening their criteria”, says Le Roux.

Home owners virtually across the country have seen an escalation in their municipal rates as new housing valuations are taking place. Le Roux agrees with Loos but also argues: “Incidentally I don’t agree with the system with regards to the fact that we are not only are taxed based on a sliding scale, which I am in favour of, but we’re also paying municipal rates on a sliding scale. One does not pay more at a toll gate for driving in a luxury car, why should one pay more for clean water and refuse removal than the next person simply because one lives in a more expensive suburb? It’s basically a double taxation whereas I believe we should have standardised municipal rates applicable to everyone.”

The biggest problem remains the issue of household savings: “It is true that South Africans are not saving enough. To have, as Loos reports, a net saving at 0% of disposable income is simply not acceptable”, believes le Roux. This lack of household savings often means the home loan applicants do not have the deposit required.
Le Roux refers to the report, released by Africa Focus Economics on 6 September, that in China domestic savings are equivalent to 55% of GDB and in India just under 35% of GDB.  In South Africa domestic savings are around 17% of GDB.
Not only does this make us too reliant on foreign capital, it actually inhibits the property market.
Le Roux believes there is a possible solution: “Two or three decades ago it was not uncommon for agents to look for collateral investments from family and friends to enable applicants to obtain mortgages - maybe we are right back there.  There are therefore solutions, provided South Africans save, and have the savings to render such assistance.
This being said Le Roux believes that we’ll be seeing more rate cuts of up to 1% by early 2014. That does not however negate the fact that South Africans need to start saving, and doing so urgently.


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