Impact of the repo rate increase on the property market

Impact of the repo rate increase on the property market

Private Property South Africa
Sarah-Jane Meyer

At the SA Reserve Bank’s Monetary Policy Commission (MPC) July meeting, Reserve Bank Governor Lesetja Kganyago indicated that more hikes are almost certainly on the cards as domestic and global inflation heats up while economic growth is cooling down.

According to Bloomberg, the US Federal Reserve may also raise interest rates by 75 basis points toward the end of July as officials turn to more aggressive measures to battle inflation. This scenario comes after the annualised US inflation rate was announced to have accelerated to 9.1% in June.

In general, SA property professionals were not surprised by the MPC’s decision to increase the repo rate. However, some had hopes of a more minor increase.

“We have been expecting a slow and steady increase in interest rates for a while,” says Tony Clarke, managing director of the Rawson Property Group.

“Realistically, the lows that we had mid-pandemic were never going to be sustainable in the long term. Unfortunately, factors like international conflict, increasing global economic pressures and our own ongoing energy crisis have forced that slow and steady rise to take a steeper trajectory than we had hoped for.”

Industry comment

FNB chief executive Jacques Celliers says that interest rates are rising rapidly around the world as central banks take steps to reign-in inflation and restore price stability.

“To place the rate hike in perspective, the new prime rate remains below the pre-pandemic levels of January 2020. This means the SARB’s monetary policy remains in line with longer-term trends if we look beyond the extreme measures taken during 2020. However, consumers and borrowers should be aware that further rate hikes by the central bank are a possibility in the coming months. We also expect upward consumer price pressures to remain in place for several months.”

Dr Andrew Golding, Pam Golding Property group’s chief executive, says that because the interest rate remains below pre-Covid levels of 10%, property is still attractive to home buyers.

“More significantly, banks are still keen to lend, and this is providing a solid underpinning for the local housing market, even as we move into an era of gradually rising interest rates and increasing pressure on household finances. The latest Ooba data shows that mortgages as a percentage of purchase price have risen to a level of 93% in recent months, which is the highest level in well over a decade.”

Chairman of Seeff Property Group, Samuel Seeff, says although the increased interest rate will impact the cost of debt and mortgages, it is unlikely to affect the underlying demand in the market.

“The reality is that the weaker rand and inflation spike to 7.4% - the highest since the 2009 global financial crisis - has accelerated rate increases. We are likely to see more aggressive hikes in September and November with the prime rate back to the pre-pandemic level of 10% by January 2023, if not sooner.”

Lew Geffen Sotheby’s International Realty chief executive, Yael Geffen, says a rates hike was expected, but imposing a 75 basis points increase on consumers will be devastating.

“This is the highest single rise in nearly 20 years, putting massive pressure on South Africans who are already dealing with huge increases in the basic cost of living and the previous rates hikes already imposed this year.

“The effect will be even worse for mortgage holders. What this increase means for home buyers in the R2 million range is a monthly repayment hike of nearly R1 000 or some R3 000 since November last year.”

High Street Auctions director, Greg Dart, says although a repo rate increase was expected, a 75-basis points hike will be a significant blow to South Africans already battling a tsunami of food, transport and utility cost increases.

“The effect of the highest rate hike in nearly two decades is going to have a domino effect on the economy, with inflation putting massive pressure on the private sector as wage expectations rise in line with the cost of living.”

The regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, expects buyer activity to take a knock following this latest hike. However, he is also optimistic that demand for property will remain strong.

“Interest rates are still 1% lower than pre-pandemic levels when prime was at around 10%, and the housing market was still active then. Even after this latest interest rate hike, it is still more affordable to take out a home loan now than it was back in 2020, so I believe the market will remain active despite the increasing interest rates.”

Gerhard Kotzé, managing director of the RealNet estate agency group, says the rate increase is a sharp reminder to existing homeowners to pro-actively manage their incomes and search for more ways to trim expenses.

“The hike increases the minimum monthly repayment on a R1m home loan by around R480. It also increases the repayments on other debts like vehicle finance and credit cards. In addition, interest rates are expected to rise even further by the end of the year, so now is the time for consumers to be putting their household budgets under the magnifying glass.”

Berry Everitt, chief executive of the Chas Everitt property group, says the 75-basis point hike is not expected to make much of a dent in the housing market.

“We think the ready availability of home loans with very low deposit requirements is one of the main drivers of continued demand now. Many buyers are looking to qualify for a loan before they are shut out of the market by the fact that salaries are growing much more slowly than either inflation or the rising interest rates.”

Buyer focus

Everitt says that home sellers should be aware of the transition that is taking place in the market and will no doubt accelerate with the additional interest rate increases expected over the next 12 months.

“Even if the number of properties on the market does not increase significantly, and even if the current rate of demand is maintained, affordability is going to decline across the board. This means that buyers will focus on value for money, which will put pressure on price growth, if not prices.

“Our advice to serious sellers is to anticipate this and start setting their listing prices accordingly. They should also look for agents with excellent negotiating skills and the backing of an agency with the resources to ensure that their home gets maximum exposure to potential buyers and to sustain the transaction all the way through to registration.”

Writer : Sarah-Jane Meyer

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