up up and away
04 April 2008

It’s virtually certain that the Reserve Bank will, once again, raise interest rates when it convenes next week.

This is the opinion of Tony Clarke, MD of Rawson Properties who estimates that, in the wake of CPIX inflation of 9.4 percent, a hike of a full 100 base points is all but certain. This will take the prime interest rate to 15.5 percent.

“That,” says Clarke, “will be a blow to many home owners who are already struggling to pay their bonds. It will deter investors, some of whom are now pulling out and convince many first-time home buyers that they now have no hope of getting onto the property owners’ ladder.”

A one percent rise in the interest rate will mean that people with bonds in the region of R1-million, who are now paying close to R13 000 per month, will have to find an extra R750 per month.

“There is,” says Clarke, “a growing suspicion that the consumer is bearing the full burden of the government’s mistakes made a decade ago when they totally failed to appreciate how fast energy demands would rise. The load shedding and cut-backs on electricity supplies are a contributing cause of the current high inflation rate, now over nine percent. Many industry leaders feel that the government should be using its reserves to bail out Eskom, rather than again hitting the consumer on whom, in the long run, the entire economy depends.”

Asked if the much discussed rise in rentals, that is expected to follow the interest rate rise, will not at least partially compensate for the higher bond payments, Clarke said that most tenants are on fixed contracts and rent escalations traditionally kick in only a year or two years after the contract was signed.

“In any case,” he said, “it is not the investors, it is the potential home owners at the bottom of the market that the government should be concerned about and as I have indicated these are rapidly abandoning their plans to buy, even in the lowest priced property arena.”

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