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.