Fully Furnished Accommodation – Property Rentals

14 August 2008

Compiled by: Jacques du Toit, Senior Property Analyst, Absa Home Loans

The Reserve Bank’s Monetary Policy Committee (MPC) decided to keep the key monetary policy interest rate – the repo rate – unchanged at 12,0%, mainly on the back of weakening economic conditions. As a result, the commercial banks also left their lending rates to the public, i.e. prime and mortgage rates, unchanged at 15,5%. Interest rates have been hiked by a cumulative 500 basis points since June 2006.

The CPIX inflation rate surged to a level of 11,6% year-on-year in June this year – its highest level ever and well above the 6% upper limit of the inflation target range.  Rising food and fuel prices, on the back of rand exchange rate and international oil price movements, have been the main drivers of inflation, while the impact of the recent electricity tariff increases still have to work through to inflation. Excluding the food and energy components,  CPIX inflation increased from 2,5% in mid-2006 to 6,3% in June this year, which is an indication of secondary inflationary pressures in the economy. However, with CPIX expected to peak before the end of the year, interest rates are forecast to be cut in the second quarter of 2009, with some further rate cuts expected towards the end of next year.

The residential property market has cooled off significantly since late 2007, with nominal year-on-year house price growth, according to Absa’s calculations, down to around 3% in July this year – its lowest level since September 1999. In real terms, prices were down by 7,3% in June this year, which was the biggest year-on-year price drop since April 1993. The current conditions in the housing market is believed to be the result of developments on the economic front such as surging inflation, rising interest rates and declining real household disposable income growth, all of which have put the household sector under severe financial strain. These factors, together with the impact of the National Credit Act, had negatively influenced the affordability of housing, which dampened the demand for housing.

The affordability of housing has been negatively affected by the higher interest rates, with the cumulative rise of 500 basis points in rates since June 2006 having caused monthly mortgage repayments to rise by 35,6%. This occurred in conjunction with sharply rising fuel and food prices over the past two years, which severely eroded consumers’ spending power. Based on the ratio of household debt-to-disposable income, which reached an all-time high of 78,2% earlier this year, the cost of servicing household debt increased to 11,3% of disposable income as a result of the higher interest rates – its highest level since the 12,3% recorded in the first quarter of 1999.

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