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Saturday, September 1, 2007
Bad for housing

After two days of debating the conditions in the international and South African economies, the Reserve Bank’s Monetary Policy Committee (MPC) eventually decided to raise its repo rate by yet another 50 basis points to 10%, effective 16th August 2007. This has now pushed prime to 13,5%, up from its trough of 10,5% little over a year ago.

Various factors prompted the move: inflationary pressures were once again cited, with suggestion that this may not be the last of the run of hikes. Upward pressure on South African prices is coming from persistent higher international oil prices, the weaker rand exchange rate, higher food prices on the back of demand and supply conditions locally and globally, and fears of higher than expected wage settlements.
Indeed, when strikes are launched in protest at low wage increases, workers are sending a clear message that from their real retail experiences actual inflation is a good deal higher than official figures (see accompanying story).
Jacques du Toit, Absa senior economist, said the rate increase was to be expected considering the continued strong growth in domestic credit extension and the huge current account deficit. “The move will put more pressure on consumers’ finances, which have already been adversely affected by rising fuel and food prices in recent times. The higher rates will cause debt servicing costs to rise, of course, taking into account a record high household debt ratio of almost 76% in the first quarter of this year.”
The Managing Executive of Absa Home Loans, Gavin Opperman, said the higher prime rate will make it even more difficult especially for first-time buyers in the low- and middle-income groups to buy their own homes. The total 300 basis point increase in interest rates since June last year has pushed the average monthly repayment on a mortgage loan over a 20-year period up by a total of 20,9%.
For example, on a R500 000 mortgage loan over a 20-year period, the monthly repayment has increased from R4 992 in mid-2006 when the mortgage rate was 10,5%, to R6 037 at the current interest rate of 13,5% - an increase of R1 045 per month. “This illustrates the importance of factoring in an interest rate of up to 300 or 400 basis points above the prevailing rate at the time of applying for a mortgage loan. Such a calculation will help an applicant to determine whether he will still be able to service the mortgage loan when interest rates are to rise,” he advised.
“One of the most important things to remember when experiencing difficulty in servicing your debt, is to contact your bank without delay in order to arrange alternative ways of repayment. Failing to do this may result in a client’s property eventually being repossessed by the bank in an attempt to recover the outstanding debt.”
 

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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