/ 22 June 2001

House prices set to rise

Mboniso Sigonyela

The Reserve Bank’s interest-rate surprise will provide a further fillip to buoyant house prices especially in Gauteng. This is good news for owners as houses are in most cases an individual’s biggest asset. But property economist Erwin Rode warns buyers to be careful of an interest-rate trap.

“Most people will rush into the market taking advantage of lower mortgage rates. An interest rate cut results in economic growth, which increases demand and therefore imports. When the rise in imports gets out of hand the Reserve Bank would normally react with an interest-rate hike,” said Rode speaking on Classic Business.

If this happens buyers who bought when interest rates were at the 13% level will find that repayments, including interest, are beyond their budgets. Rode suggests that when buying, people should leave themselves some space in case interest rates go up one or two percentage points in future.

Besides the indirect impact of a cut, increased demand for houses exerts upward pressure on prices.

“More people can now afford a house at a certain level, so demand will also increase directly for that specific level of prices,” says Rode.

Prices in Johannesburg and Pretoria are leading the pack going up 20% year-on-year over the past year, and experts believe there is room for a further 10% improvement before they start levelling off.

Returns in the Western Cape and KwaZulu-Natal are not as spectacular. The former is levelling off while Durban is recovering from a dismal past couple of years. Rode says Durban had a structural problem in its economy.

“The manufacturing sector, which is the pillar of its economy, took a serious knock when South Africa became a player in the global arena.”

ENDS