Unchanged rate signals tougher times for home buyers

Although widely expected, the Reserve Bank’s decision last week to leave the repo rate unchanged at 5% was still disappointing, given the slowing pace of already sluggish economic growth and falling consumer confidence.
So says Shaun Rademeyer, CEO of BetterBond home loans, SA’s biggest mortgage originator, who notes that there were many, especially in the real estate industry, who hoped that Reserve Bank Governor Gill Marcus might see her way clear to making a rate cut, “even if it was a drop of only 25 or 50 basis points, to give the economy and the property market a psychological boost before the holiday season”.
The Governor said, however, that although a rate cut had been considered, the upside risk for inflation was still too high because of the risk that the rand exchange rate would worsen.
On the other hand, the Monetary Policy Committee had decided that a repo rate increase to keep inflation in check would not be appropriate either, given the extremely slow rate of GDP growth (revised from an expected 2,1% for 2013 down to 1,9%) and low levels of both business and consumer confidence.

The downward trend of household consumption expenditure – that is, weak demand in the economy – would help to counter inflation, and slower bank credit extension to households was likely to reinforce this trend, she said

Indeed, notes Rademeyer, inflation is expected to remain below the 6% upper target for the rest of this year and next, and economists are predicting that there will actually be no further interest rate movements now until 2015.
“However, this stability is likely to come at a cost to prospective homebuyers. Between trying to reduce their debts and trying to cope with ever-higher transport, food, medical, education and electricity costs, they are not likely to have much disposable income left over in the coming year to either save for a deposit or afford a bond repayment.”
Certainly, he says, the current low interest rates, which have remained the same since July 2012, have not resulted in any significant decline in the household debt to disposable income ratio (now at around 74%) or improvement in the household savings ratio.

“First-time buyers may thus have to defer their home buying plans, which will take a lot of the impetus out of the market – and out of the economy as a whole because of the ripple effect that home buying and building has on many other sectors.”
As for existing homeowners, Rademeyer says, they will also be getting no relief on their monthly bond repayments now, “but they have been given another opportunity to pay any extra income, such as a 13th cheque, into their home loan account and build up a buffer against future interest rate increases.”

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