Impact of Interest Rate Hike on Residential Property

Private Property South Africa
John Loos

The half-a-percentage point June 8 interest hike shouldn't break the bank for most people.

In terms of actual financial cost to bondholders, the June 8 interest rate

hike was not extreme. It adds about R34/month per R100,000 to a person's 20-year

bond repayment at prime rates. This is R338/month on a R1 million house.

However, home owners/ buyers should read the signal that the Reserve Bank is

sending, i.e. it is concerned with the pace of growth in domestic credit demand,

and that it is prepared to hike interest rates to curb demand even when

inflation is well under control.

It makes life a little less predictable, and one would be well-advised to budget

for risk of further mild surprises on the upside, though probably not more than

1 percentage higher. The interest rate hike will probably have only a marginal

impact on prospects for capital growth for the market as a whole. House price

inflation for the market as a whole has been declining since late-2004, and this

trend is expected to continue until late-2007 with or without an interest rate


However, within the total market the impacts may vary from segment to segment.

As the residential property market has weakened, with rising perceptions of

in-affordability on the upper-end of the market, demand appears to have shifted

downward towards the cheaper end, and at present, the best performance in the

market may not be too far above the R500,000 price mark, while above the R2m

mark the weakness appears severe. The interest rate hike may hasten the downward

shift in demand, and we may, somewhat ironically, see an improved capital growth

performance in property around the R500,000 mark and even below, not only buoyed

by the search for greater affordability but also by the fact that Minister

Manuel's transfer duty relief had the greatest positive impact on property

priced at the R500,000 level.

Besides the upper end of the market, buyers should also tread with caution when

dealing in market segments that are highly-speculative and not supported by

strong demand for living (buy-to-live or rental) space. "Investors" in the more

speculative markets may have been buying purely in the hope of short term

capital gains, borrowing highly while playing the differential between property

price inflation and the interest rate on borrowing. The uncertainty created by

the SARB may scare off much of the speculation.

More speculative markets may include certain luxury developments that seemingly

have little rental demand, such as certain luxury CBD apartment developments,

while certain coastal holiday areas (purchases that many people can postpone in

times of interest rate uncertainty), too, may suffer from low income yields due

to irregular rental traffic.

Housing markets catering predominantly for permanently employed residents, and

where continuous rental streams are generally assured, are not expected to be

severely affected by last week's rate hike. Rental demand could even strengthen

somewhat due to increased interest rate jitters. One-home owners in general

shouldn't be easily moved.

Besides our belief that the current round of rate hiking will not be severe, and

as such should have limited negative impact on an already-weakening market, it

is important to realise that the hike comes at a time where SA is going through

some rand weakness. This rand weakness serves to provide a short-term stimulus

to the overall economy and therefore to job creation and household income. This

in turn provides some support for the housing market. Real economic growth is

therefore expected to continue in a range between 4% and 5%, sustaining strong

housing demand growth in the coming years. This is expected to precipitate a

turnaround for the better in the residential property market by 2008. The impact

of the interest rate hike thus appears mildly negative at worst.

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