Recently, Standard Bank’s economics division released an update on its residential property gauge. House-price rises slowed from 6,5% in June to 6% in July, the lowest growth rate since December 2002, and the bank believes the slowdown in property price growth is now entrenched.
It also predicts that growth in house prices will continue to fall over the short term and possibly even reach a point where, after accounting for inflation, there will be no real growth in property prices.
The good news is that it expects house prices to recover towards the middle of 2007. But it leaves the question as to whether you should be investing in residential property.
Standard Bank estimates that, based on current house prices and rentals, owners are only covering in the region of two-thirds of bond repayments. This has been driven in part by the fact that vacancy levels have been climbing. Absa estimated a year ago that the top end of the rental market was experiencing vacancies of 45%.
However, with property investors under pressure, now could be a good time to be buying your first home — even if interest rates are climbing. The good thing about the rate climb is that it is no longer a seller’s market. According to FNB’s Residential Property Barometer, 60% of sellers are not realising their asking prices, so property prices are stabilising.
This means you are more likely to get away with a cheeky offer. But it is important that you stress test your budget. Economists estimate an additional 100 to 150 basis-point increase in interest rates. You need to include this in your repayment affordability. At current mortgage rates of 10,5% (0,5% below prime), you would pay about R5 000 a month on a R500 000 bond. To be on the safe side, assume interest rates will go up by a further 150 basis points over the next year. This means your mortgage would be 12% and you will be paying nearly R500 extra a month. This should give you some incentive to haggle the price down.
To fix or not to fix
FNB says that on a bond of R500 000 you could qualify for a variable rate of prime less 1,5%. So your rate would be 9,5%, requiring a monthly instalment of R4 660. If you opted for the same loan with interest rates fixed for a year, the rate would be 10,85% — 1,35% higher. This would be a repayment of R5 110 a month. If you opted for a 24-month fixed rate, your interest rate would be 11,05%, or 1,55% higher, with a monthly instalment of R5 177.
Basically, the bank has estimated the rate will rise by more than 100 basis points over the next year and built that into the price today. You start paying the higher interest rate immediately and your repayments jump by R450. Over the next 12 months, you will pay R61 320 in instalments.
Economists expect a 50-basis-point rise on August 3 and an additional 50-basis point hike in October. There is a possibility of a further 50-point hike in February.
If you do not decide to fix your rate, and the economists are correct with this year’s predictions, from August your variable rate will increase to 10% and your repayments will increase by R165. In October they will increase by a further R166, or R331 more than you are paying today. If there are no further rate increases, over the next 12 months your total instalments will be R59 560. If you had fixed your rate, you would have paid an additional R1 760.
However, if there is a further rate hike in February, then you will pay an additional R169. This means over the next year your total instalment would be R60 574, still less than you would pay for a fixed rate. The bet you are taking if you fix your bond is that there will be more aggressive rate hikes than the banks’ economists predict.
These numbers are based on interest rates on August 1, prior to the interest-rate announcement on August 3