Roy Cokayne
High household indebtedness levels are likely to result in the Reserve Bank’s latest 0.5 percentage point cut in interest rates having only a muted impact on both the residential property market and new vehicle sales.
Tony Twine, a director of Econometrix, said on Friday the impact of the rate cut on both these markets was likely to remain subdued, as it had been since the first reduction in interest rates in 2008.
He said the debt-to-disposable income ratio of consumers remained at more than 78 percent and at this level banks were reluctant to extend new credit to the household sector because of the provisions of the National Credit Act.
“If there is uplift in vehicle sales, it will probably be derived from the business sector, which I suspect has been primarily responsible for the growth in passenger car sales this year,” he said. “I don’t think this is a watershed interest rate cut that catapults us into new patterns.”
However, Anton de Wet, Nedbank’s managing executive for retail personal banking and client value management, believed the effect of an interest rate change on the disposable income of most South Africans was much wider than previously thought.
De Wet said Nedbank research revealed many middle-income clients could have up to 10 loan products from different institutions, with at least four of those from a bank, including a home loan, vehicle finance, a personal loan and a credit card.
He said: “For an average middle-income client with a home loan and vehicle finance, the combined effect of both loans means a household could have had savings of around R3 094.36 on monthly repayments since 2008 at the height of the recession.”
Erwin Rode, the chief executive of Rode & Associates, said rates had a significant but normally only modest impact on residential property prices.
But Rode suspected the effect of this rate cut on property prices would be negligible because of the state of the world economy and the overindebtedness of consumers.
Rode added that interest rate movements did not have any direct influence on the commercial property sectors, but indirectly influenced the economy and therefore demand for commercial space.
“However, it might have a slight positive influence 12 months down the line because changes in interest rates have a lagged effect,” he said.
He said the biggest impact of the cut would be on mortgage bond repayments, but this would be wiped out next year by increases in income tax and electricity prices.
John Loos, a strategist at FNB Home Loans, said the combined impact of this rate cut and the reduction two months ago could provide some mild stimulus for residential property demand.
Loos said the lower rates could help stabilise the market next year and the current state of real year-on-year house price decline could be arrested towards the middle of next year.
Samuel Seeff, the chairman of Seeff Property Services, said this further interest rate cut would improve buyers’ confidence, but the key issue for the market was whether it would have any impact on banks and their lending criteria.
“Until banks decide to adjust their lending policies to become more favourable, the rate will have little initial impact on the marketplace.”