Coming off a period of historic low interest rates, 2022 has proven to be somewhat of a shock to consumers. It’s not as though they weren’t warned that interest rates would rise again, but when the South African Reserve Bank (SARB) pushed the repo rate up by 75 basis points in July (the steepest hike since 2002), and with five increases in less than a year - so far - households are feeling the squeeze.
Economists perspective
First, it is important to understand that inflation measures the rate at which prices for services and goods rise, and this typically coincides with economic growth, but not always. If an economy grows ‘too’ fast (usually because of excessive demand), things may become more expensive and very quickly so, and in many cases suppliers cannot keep pace with demand. To control this, interest rates are raised to discourage spending and borrowing. Dawie Roodt, Chief Economist at Efficient Group, simplifies this when he explains … “the higher the interest rate, the more expensive money becomes. This means people borrow less, spend less, and so economic growth slows."
But we want growth, don't we? "Yes, but high inflation has many negative consequences. It 'steals' from savers and 'gives' to borrowers and is, therefore, particularly bad for fixed-wage earners. Inflation distorts relative prices, which undermines economic growth.”
During the Covid years, the SARB reacted in the best interests of the citizens of the country, as well as in its best economic interests, by lowering the interest rate substantially. Not doing so would have harmed the economy. It gave breathing room to those who experienced financial distress due to lockdowns, largely the low-income group.
2022 is nothing like 2019, when the year started with an interest rate of 10.25%. But, just like unpredictable changing conditions affect inflation, so too has the Russian invasion of Ukraine and China’s Zero Covid policy affected cash flow. So, while the SARB, like most other international central banks, needed to bring inflation under control by increasing the interest (repo) rate, consumers feel doubly impacted because of the disruption of global supply chains.
The 'change in conditions results in the stock market and asset-ownership fluctuations. Absa's Senior Economist Corporate and Investment Banking, Peter Worthington, reminds us that South Africa is not unique in this, with interest rates being hiked globally in the same way that they were reduced during the Covid peak. "If the SARB did not increase the repo rate, it is very likely that inflation would rise further. It's a challenging situation because, unlike the US, for example, South Africa does not have the same robust demand for goods, and it has a much higher level of unemployment."
Roodt adds that there are, in fact, many other things the government could do to fight inflation, but "these are politically difficult". Both Roodt and Worthington agree that consumers need to understand that interest rates fluctuate and that it is prudent only to take on the amount of debt you can handle.
"In the short run, the story is inflation is rising, and the SARB needs to get on top of this. At some point, it will settle at a neutral level," says Worthington. And yes, there are more interest rates planned, estimated to be another two before year end, bringing us closer to the levels of 2019. But as Roodt says, the 10.25% of 2019 is not a magic number, and although we are not sure how much rates will go up even further, all we can do is plan and budget prudently.”
How this impacts the property market is multifold. Rising interest rates do, as Worthington says, remove some buyers from the market, particularly first-time buyers. “There is also going to be a percentage that bought during the lowest interest rate period, that may be struggling to make mortgage payments and, therefore, will consider selling.”
Agency perspective
Marcel du Toit, CEO of Leadhome, and John Herbst, CEO of Fine and Country SA, are reading the market. From Herbst is the message that "the rising interest rates will likely see a lower demand from first-time buyers, but the premium market buyer activity will remain consistent with global trends where there is an increased demand for spacious urban and peri-urban homes. These cater for remote work, intergenerational co-habitation, country lifestyle choices and self-sufficient power, water and security solutions.”
Du Toit makes the point that while the rising interest rate may decrease the number of people who can afford to buy, it drives down competition for properties. “But this is good for the rental market.” Du Toit also anticipates that house prices will reduce towards the end of the year. “When interest rates go up, home buyers get less bang for their buck in terms of home loans." He provides a simple formula: "When the prime rate was 7%, a buyer could get a loan of R1.5-million at a monthly repayment of R11 629. At 9%, the loan reduces to R1.29-million, and at 10%, that goes down to R1.2-million. So yes, selling prices will come under pressure until the market corrects.”
Agencies and agents should, therefore, be stressing their role as an intermediary. "For that matter, all stakeholders should be guiding, counselling, and advising consumers in respect of all elements of a property transaction, most importantly the associated financial obligations and ongoing costs attached to ownership,” says Herbst.
Du Toit wholeheartedly agrees. “It is a moral imperative for agencies to provide the full picture. Unscrupulous practices will result in distrust, which is at the core of a successful property business.”
Those who remain most active in the market will be largely property investors, landlords, and buyers who have a “sizeable” deposit, says Du Toit. “There is anecdotal evidence of cash purchasers in the higher end of the market together with a significant interest in property purchasers from the international market,” he says.
Conclusion
In Australia, the punt is “take a chill pill”, and perhaps this is good medicine for South Africans in the property space. Over the long-term, whether it’s falling house prices or a diminishing affordability range because of the interest rate, property is usually purchased as a place to live for several years and will appreciate in capital. And there is always the "willing buyer, willing seller" adage that applies regardless of market conditions. Consumers must aim to be debt-free, add an emergency fund to the budget, build up a relatively good deposit, and ensure the conveyancing and associated buying and moving costs are covered.
It's never easy to predict, and forecasters in current times are reluctant to do so. Perhaps the best advice is to show potential buyers a range of homes, those that are affordable now at the current interest rate and what will be affordable up to a suggested 11%. Tighten your belts - it’s going to be rocky for a while!
Writer :Kerry Dimmer