Will the Property Market Benefit from More Interest Rate Cuts?

An unexpected decision by the Reserve Bank to cut interest rates by 50 basis points this month brings the prime rate to levels last seen in the 1970s, but further cuts seem unlikely, economists warn. The five percentage point decline in interest rates since the end of 2008 is the main reason for the improvements seen in the property market, which started achieving growth in real terms in August 2009 after a lengthy period of decline, First National Bank said in a recent report. While the latest cut is expected to boost prices further, it won't be sufficient to drive prices to the peak levels seen in 2008, experts warn. Household income remains under pressure, while debt is still at high levels. The increase in residential property prices, coupled with wage deflation, means houses are becoming less affordable again. A second measure of affordability - the instalment on 100% home loans as a percentage of average remuneration - also declined further in March, FNB said. It is unlikely that the property market will benefit from any further interest rate cuts. The current prime rate of 10% is widely expected to stay at constant levels during 2010, with a gradual increase in interest rates predicted to start at the beginning of 2011 and continue throughout 2012. However, South Africa's consumer inflation slowed back into the 3% to 6% target range in March, which may signal the potential for a further interest rate cut later in the year, rather than an increase as anticipated. It also seems as if the Reserve Bank is planning to use interest rates as a tool to weaken the strong rand to assist exporters, who are struggling to stay internationally competitive due to the strong currency. This increases the likelihood of a further interest rate cut, some economists say.