Prime lending rate increased to 7.75%

Prime lending rate increased to 7.75%

Private Property South Africa
Private Property Reporter

For the second time this year, the South African Reserve Bank's Monetary Policy Committee increased the repo rate by 25 basis points to 4.25%, bringing the prime lending rate to 7.75%.

Three committee members voted for the announced increase, and the other two members suggested a 50-basis point rise in the repo rate.

In his statement, the South African Reserve Bank Governor Lesetja Kganyago said that, given the inflation forecast, the implied policy rate path of the bank's Quarterly Projection Model (QPM) indicates gradual normalisation through to 2024.

"As usual, the repo rate projection from the QPM remains a broad policy guideline, changing from one meeting to the next in response to new data and risks," said Kganyago.

The governor said the SARB's forecast for global growth in 2022 is revised down to 3.7% - from 4.4% - and for 2023 is lowered to 2.8% - from 3.3%. This is as a result of the war in Ukraine and the ongoing spread of the Covid virus in Asia and elsewhere. For 2024, expected global growth is unchanged at 2.7%.

"Dramatically higher oil, commodity and food prices, additional constraints to trade and finance, and rising debt costs, create more adverse economic conditions for most emerging and developing economies," said Kganyago.

Industry comment

"The MPC's decision was in line with predictions from most economists, who expected a slow and steady rise in interest rates as the SARB attempts to normalise the aggressive cuts that were made early in the pandemic," says Tony Clarke, managing director of the Rawson Property Group.

"Global economic conditions have also become a lot more complicated with the war between Russia and Ukraine. Factors such as global supply chains, food production and fuel prices will inevitably put pressure on inflation in several countries, including South Africa. An adjustment to the repo rate is one of the few mechanisms the SARB has for managing inflation, so we believe further increases are on the cards."

Chas Everitt International property group chief executive, Berry Everitt, says the fact that the economic growth forecast for SA was raised to 2 percent this year from 1.7 percent just two months ago should, in due course, translate into more employment opportunities.

"At the same time, the rand has been strengthening in anticipation of the repo rate increase, and this will help to contain the "imported inflation" that SA experiences due to higher global prices for fuel and basic foodstuffs. This will hopefully bring some relief to the many households already struggling to make ends meet."

Gerhard Kotze, managing director of the RealNet estate agency group, says the 25-basis point increase takes account of the difficulties many households are already facing due to steeply rising fuel, food and utility costs.

Pam Golding Property group chief executive, Dr Andrew Golding, says that by increasing the repo rate by a moderate 25 basis points for the third consecutive MPC meeting, the SARB endeavours to normalise interest rates in line with its stated strategy. This is amid a resurgence in inflationary pressures and a lukewarm economic growth outlook.

"Although we would have preferred an unchanged repo rate, this moderate approach has in all likelihood already been factored in by the housing market," says Golding.

"Attempting to tighten monetary policy to dampen price pressures without derailing the economic recovery was already challenging. Now the war in Ukraine has created further uncertainty and financial market turmoil. This, together with the West's sanctions against Russia, has sent global commodity prices soaring while surging food and energy prices, in particular, have forced local analysts to revise their inflation forecasts."

Chairman of the Seeff Property Group, Samuel Seeff says: "We had hoped for a pause in interest rate hikes to provide some reprieve for homeowners and buyers who are facing rising costs. However, we believe the market is now well aware that the rate is stepping up this year to counter inflation and to normalise it after the sharp rate cuts in 2020.

"Although the market is taking the rate hikes in its stride and we continue seeing strong activity as we come out of one of the best summer sales seasons, there is no doubt the rising interest rates are beginning to pinch. Households and homebuyers will need to adjust."

RE/MAX of Southern Africa regional director and chief executive, Adrian Goslett, says South Africans will have to tighten their belts over the next few months.

"Rising fuel and food costs as well as higher debt repayments resulting from the latest interest rate hike will undoubtedly put pressure on household budgets," he says.

However, he believes South Africa could be poised for growth if it positions itself well to fill the global supply/demand chain gaps.

"Exports already increased by 8,5% in the fourth quarter of 2021, and this stands to increase further in 2022 if the correct opportunities are seized. The SA housing market also poses an appealing option for foreign investors who wish to diversify their portfolios to limit risk in an increasingly chancy global economy."

Home loans

This is the third interest rate hike since November last year, and it means that the minimum monthly repayment on a new 20-year home loan of R1 million at prime will now be around R450 more than it would have been six months ago.

Kotze says it also means that buyers applying for a R1m loan now will need to earn around R1 500 a month more to qualify than if they had applied six months ago.

"This may be difficult in SA's current low-growth economic environment, where many companies and organisations are struggling to retain staff at their current salaries," he says.

"The alternative would be to buy less expensive properties. For this reason, we expect to see increased demand in the lower price bands of the property market, where there is already a severe shortage of stock. This will, in due course, place upward pressure on prices, although sellers should be aware that buyers are very value conscious and will not overpay - even in multiple offer situations."

Everitt says that on a home loan of R2 m at prime, the new interest rate will add about R300 to the monthly instalment.

"Being the third such increase since the MPC meeting in November, this means the repayments on a R2 m loan have increased by more than R900 in the past six months," says Everitt.

"Because more interest rate increases are no doubt on the way this year, our advice to existing homeowners is to keep paying any spare cash they have into their home loan accounts to reduce the capital balance - and the required minimum monthly payments."

He says first time buyers will need to be very careful now not to overcommit themselves financially.

"It's important to take future bond rate increases into account when calculating what you can afford to buy. It would be helpful to obtain pre-qualification through a creditable bond originator and to work with registered and qualified estate agents to find suitable properties that match your budget."


Golding says the residential property market is holding up well, showing steady activity across all price bands, despite the recent increases in the interest rate and the unfavourable economic influences.

"The Pam Golding Residential Property Index shows that price growth has now peaked in all major regional markets, with the Western Cape recording the strongest growth rate of 6.3% in February 2022, followed by 5.4% in KwaZulu-Natal and 4.2% in Gauteng," says Golding.

"This compares with a gradual slowdown in national house price inflation which eased from a mid-2021 peak of 5.89% to 4.5% in February 2022. It is estimated that after averaging 5.6% last year, national house prices are likely to increase by 3 to 4% in 2022."

Seeff is not expecting the increasing interest rates to dramatically impact the housing market. He says that sales volumes appear to have tapered from 2021's highs, as most of the pent-up demand has now been absorbed. Regardless, he says the market is still trading above pre-pandemic levels and the outlook remains upbeat.

"At 7.75%, the prime rate is still well below the 10% level of early 2020 before we entered the pandemic. It is generally still cheaper to buy than rent, leaving you with a valuable asset and a secure roof over your head," says Seeff.

Clarke says: "We've successfully weathered far higher interest rates than 8.5%. It's definitely a good time for home owners and prospective buyers to re-examine their budgets and cut unnecessary expenses. However, we don't expect too much reduction in market activity and property price growth."

He says that financial stability is going to take centre stage, with pre-qualification becoming an essential tool for buyers.

"Getting prequalified helps improve your chances of having an offer accepted, and also provides an opportunity to prime your financial profile for preferential mortgage rates. That could go a long way towards lessening the impact of rising interest rates in the months to come."


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