The latest interest rate cuts will provide more relief for households and some support for residential property demand, said FNB property strategist John Loos on Tuesday.

"This will imply a drop in prime rate from 14 percent to 13 percent. This cut, on top of a total of 150 basis points' worth of reduction since December 2008, begins to make the interest rate stimulus significant," said Loos.

He pointed out that on a R500 000 20-year bond at prime rate, the reduction in the monthly required payment value since the 15.5 percent prime rate at beginning of December was now R912 in total.

Loos noted that the first quarter FNB Property Barometer had already shown some mild strengthening in residential demand activity since late 2008, firstly on the back of expected interest rate cuts and then more recently on the back of actual rate cuts, and he expected the mild improvement to continue through the year.

"During the second half of last year we also began to see the household debt-service ratio decline due to a declining debt-to-disposable income ratio and falling interest rates will further help the cause. A declining debt-service ratio normally signals a declining mortgage loan default rate and it is expected that later in 2009 the start of decline in default rates will indeed materialise.

"Already in the second half of 2008 we saw a steady decline in year-on- year growth in insolvencies from a peak of 102 percent in the second quarter to 26 percent in the fourth quarter, which suggested early signs of a move towards an improvement in credit quality."

He said that the usual warnings came with these comments — that while mild improvement is expected in residential demand and the start of improving mortgage credit quality later in the year, fireworks shouldn't be expected under the current recessionary conditions. Also, despite a declining debt-to-disposable income ratio, household indebtedness still remains significantly higher than it was during the last bout of aggressive rate cutting in 2003 and this implies that the household sector these days is less responsive to an interest rate stimulus than it was then.

"The FirstRand expectation is for further rate cutting at subsequent meetings to around 11 percent prime by mid-year, all of which will make the cumulative interest rate stimulus to the housing market quite significant," Loos said.

He added that although stringent bank lending criteria in the form of deposit requirements were likely to be slow in being relaxed, lower interest rates do improve affordability which is a key consideration in granting loans and in this sense rate cuts imply relaxation of lending criteria.

I-Net Bridge