The South African Reserve Bank’s (SARB) Monetary Policy Committee hikes interest rate by another 50bps taking the repo rate to 7.75% and the prime lending rate to 11.25%.
A pause in repo rate hiking cycle was hoped for, says the Pam Golding Property group
With consumers under increasing pressure from the rising cost of living and a series of interest rate hikes since late 2021, it was hoped that the MPC would keep the repo rate stable today in order to help support economic activity, says Dr. Andrew Golding, chief executive of the Pam Golding Property group.
“A pause in the upward cycle would have allowed some breathing space and stimulated positive market sentiment. A key for the economy in general and the property market in particular is the state of household finances, which are currently under pressure as a result of the recent resurgence in the cost of living and series of hikes which have taken interest rates to above pre-Covid levels.
“While higher-than-anticipated inflation (7% Feb 2023) was a contributory factor, this ninth increase today, of 50bps, which takes the repo rate to 7.75% and the prime interest rate to 11.25%, is a bitter pill for households and businesses with mortgages and credit finance – especially SMME’s – all of whom are already dealing with the significant economic impact of ongoing loadshedding.
“The SA economy is under significant pressure – with the power crisis undermining economic activity while simultaneously fuelling inflationary pressures by compelling those who can afford it to invest in back-up power. Not only does this dent household incomes and business revenues, it is also fuelling price pressures in food production and transport, with the food inflation rate reaching a 14-year high in February 2023.
“The recent easing of power outages – if sustained – will go some way towards improving the situation, both in terms of easing price pressures but also boosting economic activity and bolstering consumer and business confidence levels.
“The next question is whether or not this latest increase will represent the peak of the current interest rate cycle. Although it is particularly difficult to predict at present, on balance it is hoped that we have reached the peak of the current cycle, with the weakening in the economy likely to limit the Reserve Bank’s appetite for further interest rate hikes, at least for a while. This would then allow the full effects of the interest rate hikes already implemented to take effect.
“However, against the backdrop of a global economy still normalising from the effects of the pandemic and the outbreak of the first major war in Europe since WW2, which has impacted the rest of the globe due to globalisation of energy and food markets, as well as the recent turmoil in the global banking sector, some analysts feel there may be yet another interest rate hike before it stabilises.”
Dr. Golding, says: “A number of key factors have ensured that, while slowing in the face of a variety of economic headwinds, activity in the housing market has remained surprisingly resilient due to the banks’ ongoing appetite to extend mortgages to home buyers, including first-time purchasers, coupled with the relocation of homeowners from the interior to the coastal provinces – the Western Cape in particular. In addition, homes nationally change hands on a daily basis among those relocating, upsizing and downsizing for a variety of the usual reasons according to lifestyle and life stage changes – all of which has resulted in sustained activity in the residential property market.”
Disappointed at the rate hike, but property outlook remains stable, says Seeff
Samuel Seeff, chairman of the Seeff Property Group says the outlook for the property market remains stable and active despite the decision by the SA Reserve Bank.
“The property market is mindful that the SARB faced a difficult decision. The Eskom energy crisis, weak business confidence, deterioration of the CPI inflation to 7% in February (from 6.9% in January), and pressure on the currency left little room to manoeuvre.
“That said, we believe the 50bps is a bit steep, and the SARB could have kept it to 25bps. Nonetheless, the hike was largely expected and already factored in by the market”, says Seeff.
While not ideal, the rate is still below the historic average of the last 20-30 years, and we are still seeing a strong, stable property market.
Incidentally, Seeff says that at 11.25% the interest rate is only slightly above what it was just after the 2008 Global Financial Crisis. In mid-2008 when the GFC crisis peaked (exacerbated in SA by the introduction of the National Credit Act in 2007 (NCA)), the interest rate spiked to 15.5%.
That said, the higher interest rate will affect buyers and homeowners. It will result in higher repayments of home loans and other credit, and put further pressure on the cost of living and disposable income.
However, says Seeff, the impact of the higher interest rate is to some extent mitigated by the continued favourable bank lending climate, which is still the best in over a decade, and considerably better compared to the post-2007/8 NCA/GFC period. The increased transfer duty exemption threshold to R1.1 million is also a positive for buyers.
While overall sales volumes have declined compared to the highs of 2021, Seeff says it remains business as usual with buying and selling continuing daily. The monthly transfers also still appear to be slightly ahead of the pre-pandemic levels.
Although price appreciation continues to decline, standing at around 2% on average, the flat growth means that prices are unlikely to plummet compared to other global markets that experienced runaway price growth during the Covid-boom.
Another positive for the market is that the banks are not reporting any significant spike in financial distress. Competition among the banks means that deposit requirements are generally still below 10% and approval rates at well over 80%. This too is significantly better compared to the post-2009 period.
FNB for example recently reported that selling due to semigration for better service delivery and quality of life still seems to outpace financial related selling in the market.
The Seeff Property Group continues to assess the outlook for the property market as stable. “That said, buyers have become more selective due to financial pressures, and while there is still a good market, it is now incumbent on sellers to set their prices at realistic levels if they want to sell”.
Due to the rate hike, the monthly bond repayments over a 20-year term will increase by approximately:
- R750 000 bond – extra R255 from R7 614 to R7 869
- R900 000 bond – extra R306 from R9 137 to R9 443
- R1 000 000 bond – extra R341 from R10 152 to R10 493
- R1 500 000 bond – extra R511 from R15 228 to R15 739
- R2 000 000 bond – extra R339 from R20 305 to R20 985
- R2 500 000 bond – extra R424 from R25 381 to R26 231
Have interest rates finally peaked? What next for property? asks Rawson
“I don’t think there was any doubt that the interest rate would go up again this month,” says Tony Clarke, MD of the Rawson Property Group. “Inflation has remained stubbornly outside the target range of the Reserve Bank, and this is one of the very few mechanisms they have to bring that under control.”
“Opinions definitely seem to be trending towards interest rates remaining where they are for some time to come,” says Clarke. “Some analysts are even predicting the beginning of a downward cycle as early as late 2023.”
While this would bring much-needed relief to existing homeowners, and a valuable boost to property market confidence and buyer activity, Clarke says the road ahead for property is not without its challenges.
“South Africa’s economic woes are weighing heavily on the property market,” he says. “People are struggling to make ends meet, let alone save for big investments like property purchases. This, together with the rising costs of property finance, has steadily eroded the pool of qualified buyers.”
As a result, Clarke says property supply significantly outweighs demand in most areas, contributing to slow – House Price Inflation (HPI). Lightstone statistics show that national HPI has been positive, but below inflation for some time.
“At the moment, there are very few investments that are keeping up with inflation,” says Clarke. “South Africa – and the world – is going through a very tough phase, and it’s hurting on all fronts, not just property. The one strength property has that other investments do not is its essential nature. No matter how hard things get, people will always need a roof over their heads.”
As such, Clarke says property remains one of the most predictable safe havens in which to protect and preserve personal wealth.
“It’s easy to forget that property is a long-term investment journey and all these highs and lows are a natural part of the landscape,” he says. “My best advice right now is to buckle up, focus on protecting and improving your property’s value, and always consult with a property expert before making any big investment decisions”.
No relief for debt holds, says RE/MAX of Southern Africa
Thankfully, Regional Director and CEO of RE/MAX of Southern Africa Adrian Goslett along with other financial experts remain hopeful that interest rates will stabilise following this meeting. “Provided there are no more surprises within global markets and our energy crisis does not worsen, it is possible for this to be the last interest rate hike we’ll see for the next while. It all depends whether the MPC decides that the risks to inflation are under control,” he states.
He adds that this interest rate hike will undoubtedly be most challenging for those who bought when interest rates were at their lowest. “I’m sure most buyers plan for at least a handful of interest rate hikes, but I doubt very many would have left room in their budgets for the interest rates to climb so consistently over the last fifteen months or so,” Goslett notes.
“My advice to any homeowner who finds themselves pinched by the higher instalments is to speak to their financial institution before it is too late. Explore the option of downscaling if this will relieve the financial pressure. The last thing you want is to ruin your credit score or much worse still, have your home repossessed by the bank,” he cautions.
For real estate professionals, Goslett encourages that they be mindful of the current circumstances and remain sensitive to the fact that things might be tight for some homeowners following this announcement. “Now more so than ever before, it is important to act as a trusted advisor to your clients and to be respectful of their circumstances. It might be a sensitive topic for many homeowners so avoid being too pushy or aggressive in your marketing strategies or you might end up losing more clients than you will gain,” he suggests.
Currently, despite the series of interest rate hikes, Goslett notes that the property market as a whole continues to be active, although somewhat less active than it was during COVID. “People have continued to buy, sell, and rent properties despite the higher interest rates. The South African property market remains more resilient than I could accurately predict. My expectation following this latest hike is that, while it will be challenging for some to adjust to the higher repayments, the property market in general will weather this storm; a home priced at fair market value will still sell timeously and at full value if marketed by a reliable professional,” says Goslett.
The 0.5% increase in the repo rate is higher than expected and continues to show the uncertainty around global and South Africa’s inflationary outlook, according to Jawitz Properties.
Herschel Jawitz, CEO Jawitz Properties says, the 0.5% increase in the repo rate is higher than expected and continues to show the uncertainty around global and South Africa’s inflationary outlook. In the short term, the latest increase in the repo rate will undoubtedly put homeowners and consumers under more pressure, but the rationale behind the decision by the Monetary Policy Committee (MPC) far outweighs the risks posed by sustained high inflation. With inflation at 7%, there are very few sectors of the local residential market that are delivering inflation-beating growth in property prices.
On average, property prices are expected to increase this year by 2,75% to 3,5%, which means that in real terms after inflation, property prices are declining by a similar amount. As long as inflation remains high amid low economic growth, real property price growth will remain marginal.
“Homeowners who are under pressure to make their bond repayments should contact their bank and find ways to reduce their expenses, if possible, to avoid at all costs being forced to sell or even defaulting. This is not an ideal environment to sell a property under pressure, especially if you have a large bond relative to the market value of your home. For buyers who have the means to buy, the current market is offering good value buying opportunities. In addition, bank lending remains positive, and the rate concession banks are currently offering are very competitive,” says Jawitz.