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The interest rate and the residential property outlook

25 March 2013 Fiona Zerbst
Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

The Reserve Bank chose to leave the Repo rate unchanged last week, at 5%, which is more or less as the market had predicted. Rates have now been unchanged since July 2012, keeping us in a low-interest rate environment, with all the pros and cons that brin

John Loos, household and consumer sector strategist for FNB, says that the Reserve Bank may be stimulating the residential property market by leaving the rate unchanged. “Sideways movement in interest rates is becoming mildly positive in terms of stimulating residential demand,” he says. “But ‘mild’ is the key word.”

Real house-price growth flat

What does this mean? Loos says that aspirant home buyers are gradually becoming more confident, due to a long period of low and stable interest rates, with the pain of the 2008 recession and high interest rates gradually fading in the memories. This may, in turn, be contributing to slightly stronger housing demand, which may lead to slightly higher house-price growth in the near future. While Loos expects to see slightly high nominal house-price growth in the coming months, in real terms, that is, adjusted for consumer price inflation, he still expects flat-to-downward movement.

Of course, the downside for buyers of higher house-price growth can be that it has a negative impact on affordability and with consumers continuing to feel the pinch – and looking at an increasing debt-to-income ratio – it is unlikely that the residential property market will pick up too much this year, hence Loos’s use of the word ‘mild’.

Loos also doesn’t expect that house-price growth will be as strong as rental growth this year. But that doesn’t mean a very strong rental market either, and if landlords are hoping to make a killing, they may have to wait a bit longer; according to the PayProp Rental Index, released in February, rental increases will keep pace with inflation at best: “Within the context of other investment avenues, an investment property provides a landlord with a net return of 4% – which is still marginally above what cash in the bank will earn.”

The overall picture suggests a sluggish market that will take some time to recover. Although buying rental property is often a good way to protect money from inflation – and inflation is now expected to average 5.9% in 2013, compared with the previous forecast of 5.8% – that property is unlikely to yield high rental returns for the next couple of years.

Editor’s thoughts:
While first-time homebuyers are giving the market a boost, it’s worth noting that the average home-loan deposit dropped by 14.2% from March last year. This could be due to the slight relaxation in deposit requirements over the past few months, says Saul Geffen, CEO of bond originators ooba. Banks have eased lending criteria, which makes it that little bit easier for first-time homebuyers to enter the market. Are your clients using the low interest-rate environment to snap up property, whether for living purposes or buy-to-let? Let us know by commenting below or email


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