ANOTHER INTEREST RATE HIKE WILL BE DISASTEROUS FOR THE RESIDENTIAL PROPERTY

Reserve Bank Governor Tito Mboweni's recent signal that interest rates would
rise again this year because inflation pressures had spread far beyond food
and fuel, is already having an impact on the residential property market.
The combination of a decreasing property values with increasing interest
rates has put the residential property market in a precarious position this
year. Anecdotal reports of rising repossessions and a surge in forced sales
is now spreading to various parts of the property market particularly those
in the R2million to R5 million valuation range.

"Mortgage stress is spreading across all cities, suburbs and demographics.
Over geared middle income families are obviously the most vulnerable but
wealthier South Africans are now also being affected by a slowing
residential property market'', explains Alliance Group's Chief Executive,
Rael Levitt.

The latest research from Alliance Group's research department claims more
than 55,000 South Africans will suffer mortgage stress by September this
year, 15,000 of those will be in severe stress and 8,000 could lose their
homes because they can't meet the loan repayments.

Severe stress is defined as being unable to meet repayments without
refinancing, with many having to re schedule bond repayments.

"They are sobering figures', says Levitt, "Yet probably the scariest finding
from our research is that once someone is in severe stress there is a 20 per
cent chance of being forced to sell the property and there is only a 50 per
cent chance of getting out of mortgage stress altogether".

Levitt explains that the lesson struggling homeowners should adhere to when
in trouble, is that "you can't just ignore it and hope things will improve.
The quicker you take action, the better your chances of beating the
financial survival odds".

While inflation is now a real factor in South African economic landscape,
these mortgage bond stress levels are affecting the South African
residential property market. Retail sales are down, housing finance has
slumped, consumer sentiment has crashed and the property market is down.
"It's not as if everyone is out partying as they have been for the last five
years" says Levitt.

For an indication of just how savage our interest rate levels are, official
repo interest rates in the US are 2.25 per cent, Canada 3 per cent and
Britain 5 per cent. Compare that to South Africa's repo rate at 11,5 per
cent. If they go to 12%, as the Reserve Bank hints, this may strike another
fatal blow to the residential property market. South African home loan
borrowers are already paying five times the repayments of American property
owners. "So it's not surprising that more and more consumers are falling
into arrears".

Levitt believes that the pain of higher interest rates has only just started
to kick in and believes that we will see further residential value falls
over the next 6-12 months and another hike will simply speed up this
process.

"The South African housing market is in a bind - we have a historic housing
shortage and thus huge demand at the entry level but that isn't going to
stop prices declining further. I think we'll see prices fall by another 5
per cent this year - and that's without another interest-rate rise." "If
rates rise again it will accelerate price declines, and that's an ominous
prospect because price falls can be infectious" Levitt says. "If one house
in a street sells for a lower than expected price, that can have a knock-on
effect to other properties in the same area, and so it goes on."

The latest figures from the Alliance Research team, released last week,
showed Johannesburg house prices falling by 5.5 per cent in the March
quarter alone and Cape Town falling by 4.85 per cent - the average
performance of the five large South African cities. The Standard Bank
property gauge recently revealed the first residential price drop in 8
years.

The Reserve Bank's hint that interest rates might have to rise later this
year if inflation keeps rising, would thus be disastrous for struggling
homeowners.

"You've got to be smart in today's market," Levitt says. "There's a great
opportunity to buy properties at distressed rates. We are already seeing
great deals for buyers and with the residential rentals tracking interest
rates, investors can get a good yield through house investing. Over time the
market will settle down, as it always does, and investors will again see
capital growth". The irony, explains Levitt, is that with decreasing home
prices there is actually no better time to get into the market. "Bold
investors will make bold profits when the market inevitably turns upwards".
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