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Economy
Tuesday, July 1, 2008
What goes up must come down

Pertinent to the recent interest rate hike, which has brought the prime lending rate to 15.5%, Kevin Lancaster, CEO of Betterbond, sheds some light on the subject of interest rate hikes, assuring that there is a glimmer of hope on the horizon.
Interest rates are cyclical, meaning over each period interest rates will rise, reach a peak and then decline. “What South Africa is experiencing with the rise of home loan interest rates is part of a normal property cycle which can be found anywhere in the world. When comparing the various cycles over the past two decades one will find that the total percentage by which rates have hiked per cycle, has been approximately 6% on average,” says Lancaster.
When examining home loan interest rate changes over the past 20 years, the following is evident:
• In 1988 the prime interest rate stood at 13,5%. This increased to 20% in 1991, indicating an overall increase of 6,5% for that particular period.
• In 1998 the interest rate rose from 18% to 24% showing a rise of 6% at the end of that cycle.

From April 2005 to date the interest rate has increased by 5%. “Despite the latest increase, one can still clearly see that we are on par with the total percentage by which rates have hiked over the past 20 years. Inevitably, what goes up must come down and consumers can rest assured that there is ‘light at the end of the tunnel’,” says Lancaster.
Historically the banks considered equity in terms of lending criteria and affordability was not taken into consideration. However, over the last two decades affordability, security and integrity have been looked at more vigorously by banks – affordability being the overriding focus.
Due to numerous rate hikes over the past few months, property affordability has become a problem for homeowners and investors. Many homeowners are finding that they are unable to keep up with bond repayments and investors alike are selling off luxury investments so as to improve cash flow.
Consumers should keep in mind that despite experiencing further interest rate hikes, a decline is expected. Some economists even envisage as much as a 2.0% - 2.5% decline by the middle of 2010.


“We can and should find comfort in the fact that a similar trend has been noted in interest rates cycles in the past, and with reference to history, we could be near the peak in the current cycle. Homeowners should, however, during these tough times exercise caution and restraint in terms of spending. Make wise financial decisions so as to keep up with home loan repayments,” he concludes.
 

Copyright © Insurance Times and Investments® Vol:21.6 1st July, 2008
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