Unexpected Interest Rate Hike Provides Challenges for Property Market

In a move that surprised many the Monetary Policy Committee (MPC) of the Reserve Bank announced its decision to increase the interest rate by half a percentage point to 5.5% on Wednesday. The prime lending rate has also been increased to 9%, up from 8.5%. While it is true to most market analysts were only expecting an increase in 2015, the weakened Rand seems to have pressured the MPC into the move.

Inflation also played a leading role in the decision with Reserve Bank Governor, Gill Marcus stating that "the primary responsibility of the Bank is to keep inflation under control and ensure that inflation expectations remain well anchored."

What Does this Mean for Home Owners?
John Loos, Household and Property Sector Strategist at FNB believes that the increase could negatively impact the residential property market in the short term in that it would further contain household sector's debt-to-disposable income ratio, as well as raising the level of bad debts slightly. He does however point out that one interest rate hike is unlikely to have a big impact.

Loos also points out that "All bets are off regarding any noticeable rise in house price growth compared to recent levels, and single-digit price growth is expected to remain a characteristic through 2014".

A Word of Advice
"While we did not expect a change in the interest rate so soon our message to home owners remains the same", says Bruce Swain, MD of Leapfrog Property Group, "tighten your belts now as household debt-to-disposable-income is still high and the interest rate is likely to go up yet again so now is the time to save by paying into your bond".

Swain also urges home owners and buyers to remember that it's best to take a long term perspective when dealing with property; "over the long term house prices have continually increased in value and, regardless of short term hurdles, it property remains the best investment opportunity for the average South African" .

Article by: www.leapfrog.co.za

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