Interest Rates Hike

Private Property South Africa
John Loos


Given all of the hype surrounding the recent 50 basis point interest rate hike,

it would be difficult to argue that there will not be any negative impact on the

property market. This rate hike may have done a little more damage to the market

psyche than the previous couple. Why? Because while the other rate hikes could

be seen to have been almost pre-emptive, undertaken at a time when inflation was

still “under control”, the latest one took place after a surprise April CPIX

inflation figure which breached the 6% upper target limit. Suddenly, many people

seem less sure as to whether inflation is under control, and there thus seems to

be increased concern about where the current rate hiking cycle will end.

Where do I stand? Certainly, given the ongoing strength in the economy, I

would see no cause for panic. I believe that the long term performance of

property markets runs more on economic performance than on interest rates, and

the prospects still remain encouraging. But in the near term, one can’t ignore

the possibility of further negative impact. After all, the cost of the monthly

repayment on a 20-year 100% mortgage loan has increased considerably since the

beginning of the rate hiking phase in June last year. The table below

illustrates this. On a R1million loan the increase in the monthly required

repayment value is only R354 due to the latest 50 basis point rate hike,

assuming a prime rate of interest. However, the cumulative increase since a year

ago has been R1,732 on the monthly payment, which is considerable.

The rate hikes have also contributed a little extra to the repayment value of

an average priced house expressed as a percentage of average income, a ratio

which has already been rising for some years off a very low base.


  • The market in close proximity to the coastline is likely to be affected more significantly

than the non-coastal market. This is because of a significant portion of stock

being bought for non-essential holiday purposes. Potential buyers in the holiday

property market have the luxury of being able to hold back for a while to see

what interest rates do next, which can have a significant dampening effect on

the market.

  • Additional coastal holiday market pressure implies slightly more

pressure from interest rates on coastal provinces as a whole compared with the

major inland market of Gauteng, where a greater proportion of properties are

arguably for primary residence purposes, and thus where employment and economic

growth are relatively more important drivers. I therefore expect Gauteng,

although it is also currently in a slowing phase, to outperform the coastal

provinces in the near term in terms of capital growth.

  • Of the 3 major coastal

provinces, I expect more of an interest rate impact on KZN and the Eastern Cape

than on the Western Cape. The reason is that, especially in the case of KZN, I

believe that the coastal holiday market makes up a bigger proportion of the

total provincial formal housing market than is the case of the Western Cape.

KZN’s and the Western Cape’s economies are similar in size. However, KZN has a

far lower per capita income, and a lower percentage of its total population

falls inside the formal housing market than in the case of the Western Cape.

  • The higher-priced end of the housing market is also believed to be more

vulnerable in these times of rate hiking. While home buyers in all segments of

the market are impacted by interest rate hikes, demand for lower end housing can

be better sustained by a certain amount of shift down the price ladder that rate

hiking can encourage. For the very high end, unfortunately there is no higher

price segment from which demand can flow downward to replace clientele lost to

lower price ranges.

  • The further interest rate hike may also be a further

negative for the buy-to-let market. For the same reason as in the case of

holiday property, i.e. the non-essential nature of the property from a buyer’s

point of view, potential buy-to-let purchasers can sit and wait out the rate

hiking cycle.

Finally, the interest rate hike may be a further negative for

the development side of the market. Although strong economic growth sustains

middle class growth, and therefore growth in demand for new residential stock,

some developers may not see it that way given the hype around the latest rate

hike and the uncertainty that it creates.


rental market may ironically be one short term beneficiary of further rate

hiking, as additional households postpone their buying decision until greater

confidence on interest rates has been reached.

NO TREND CHANGES EXPECTED AS A RESULT OF RATE HIKES Despite my belief that the interest rate hiking holds some

negative impacts for the residential market, no major trend changes are

anticipated. This is because the negative impact of interest rate trends began

way back around 2005, where a lack of further cutting post-2003 caused a slowing

in the market as the great 2003 stimulus wore thin. The interest rate hiking

since last year has, therefore, merely supported a trend. We have already seen

average house price inflation on a broad declining trend for over 2 years, with

a seemingly sharper slowdown in the coastal market. In addition, the shift in

strength from the high end towards the low end has also been in full swing for a

while, and on the supply side building completions have been declining mildly

for 2 years. Mortgage advances growth, too, has been on a declining trend. On

the positive side, Trafalgar reported a turn for the better in the rental market

from late last year. Therefore, the expected impact of interest hiking is not

one of any significant trend changes but rather causing the trough in the cycle

to be a little deeper than would have been the case in the absence of rate

hikes. But I keep the expectation of average house price inflation remaining in

double-digit territory over the course of 2007, and I still anticipate the

bottoming out and the start of a recovery in 2008.


advice, as each person’s financial situation differs, and expert advice should

be obtained from a registered financial planner. It serves rather to name a few

factors that households can consider in their debt planning, given that debt

servicing costs are being driven up by rising interest rates, and given that

home buying for many constitutes a major part of many households’ borrowing.

On the whole, the current level of debt servicing cost is not at crisis levels (for

the household sector in its entirety that is).

The graph shows that the debt

service ratio, i.e. the cost of servicing the entire household debt burden

(interest + capital) expressed as a percentage of household disposable income,

was 9.3% at the end of 2006. The further hike in interest rates, accompanied by

probable further rise in the household debt-to-disposable income ratio, suggests

that the debt service ratio has risen further in 2007 to date, but is still

probably significantly below level of 12%, which represents the approximate

peaks of the last 3 cycles (excluding the abnormal spike of near 14% seen

briefly in 1998). In addition, household borrowing growth is slowing, which

should slow further growth in the household debt-to-disposable income ratio.

Therefore, no major household credit crisis is foreseen in the near term, even

should the SARB possibly hike interest rates for another time.

However, this is

no consolation for those households who are perhaps in a bit of a tight squeeze,

or for some considering entering the property market as new buyers, and for

them, some pointers for consideration are as follows:

  • Many of us have more

than one existing loan (including overdrafts on cheque accounts and credit

cards). Very often, the interest rates differ significantly between these

various types of loans. Attempting to repay the one with the highest interest

rate as rapidly as possible would normally make sense.

  • Consolidation of debt is often possible. If one is able to consolidate

    all of one’s debt into one loan and in so doing lower the interest rate of

    one’s overall debt burden, this is a further option for alleviating

    pressure. Often it is possible to consolidate debt in a mortgage loan, which

    can often offer a better rate than other shorter term debt. Once again

    though, eligibility varies between individuals/households, but this can be

    worth exploring.

  • Should one’s debt situation be sustainable at

present, and you lean toward the risk-averse side fearing that a further series

of interest rate hikes may lead to trouble, the interest rate fixing option

exists. At present, given market jitters over further rate hikes, one may not

get the most attractive fixed interest rates. But fixing interest rates is not

about making a “profit”. It is about getting greater certainty regarding one’s cashflows, and limiting the risk of further interest rate hiking. One’s appetite

for risk, as well as how much rate hiking one’s financial situation can take, is

important when considering whether to fix or not to fix.

  • When considering

increasing one’s borrowing, perhaps to buy a new house, scenario planning is a

useful exercise. Whatever forecasters may predict on the interest rate front,

the only certainty is that Interest rates will at some stage go up and at some

stage go down. Add an extra, say 2 to 3 percentage points onto the current

required monthly payment of a new loan, in a scenario simulation, and ask the

question as to whether you can still afford the loan repayment (NB, given all of

one’s other expenses). If the answer is NO, then some tough choices may have to

be made.

  • Buying smaller and cheaper is an option in the case of a house or

motor vehicle for instance. With regard to a house, consider two things. The

best returns on an investment in property don’t necessarily come from buying the

most expensive property in town. They come from the combination of the best

capital growth and income growth, i.e. the emphasis is on growth. At present,

the best capital growth seems to be found at the lower-priced end, although

location remains important. Buying cheaper and smaller may thus also have

investment appeal in many instances, besides saving on debt servicing costs. The

smaller house option may take some persuasion for many South Africans, as many

of our middle class have been used to spacious homes and large stand sizes,

compared to other areas of the world. However, the reality is that urban land

scarcity is mounting, driving up prices, and SA is moving towards a denser

smaller unit/stand size way of life. For many, trying to fight this trend in

future years could be a potential cause of financial strain.

  • Finally, it is

also important to consider that buying smaller often means lower household

running and maintenance costs, and ability to service one’s debt is partly a

function of such non-debt expenses too.

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