My response to the on hold interest rates stance is cautiously optimistic. I am cautious because this is a wait-and-see option. Cautious, because we do not know what will happen to the rand or oil prices, an issue which the Reserve Bank Governor has highlighted, and cautious because there may be other unexpected shocks to the economy.
Having said that, I am optimistic because consumers will be relieved that the pressure on their income and budgets has not increased and there is a near future option that interest rates will drop.
Barring any major economic shocks the view is that the interest rate will remain constant for the remainder of the year. A stable interest rate, albeit high at 15, 5%, provides certainty. Certainty is very important as it allows people to plan and budget with confidence.
My optimism goes further in that predictions are for a decrease in interest rate on the horizon. The discussion is now around when the interest rates will drop and by how much. Some economists are predicting December if not early 2009 as a possible declining point. Others believe the reserve bank will wait until the outcome of the revised CPIX is announced and this will only be in April so the next opportunity would be in June.
Either way the fact that relief to financial strain is within sight is enough to boost consumer confidence. The positive future with inflation under control sometime between 2009 and 2010 will be a further boost to confidence.
Investing is emotional particularly when it involves buying a property which is the largest investment most people make in a life time. Therefore sentiment and confidence play an important role.
Absa is being very cautious warning that the worst is not over for the property market. However, we are very near the bottom. From my years of experience at the helm of a leading real estate company in KwaZulu-Natal, I know that as soon as people can budget with certainty the property market will start to improve.
I am not expecting house prices to rise for a while, but I am expecting those buyers who have been on the sideline to start actively looking for property, and that is good for the property market.
I think that buyers will realise that even though interest rates make it expensive and more difficult to qualify in terms of the National Credit Act now is the time to buy. The prospect of a decline in interest next year is an added sweetener.
My money is on an early drop in interest rates either a small reduction in December or a bigger reduction early next year.