The South African Reserve Bank this week increased the repo rate from 6.5% to 6.75%. The prime lending rate has increased to 10.25%.
With inflation close to the upper end of the Reserve Banks’ 3%-6% target range, many economists had predicted that we might see a rate hike. While not unexpected, the hike just before the festive season puts more financial pressure on South Africans already feeling the pinch from numerous price increases this year and will mean higher repayments on debt like home loans, credit cards and vehicle finance.
This is what leading figures in the property sector had to say on the effect of the hike.
Richard Gray, Harcourts Africa CEO
“The perpetual knock South African consumers have to take undoubtedly affects economic activity and investor confidence. These added cost increases have to be factored into budgets and this might deter many from taking the next step.
“The bank has also downgraded its GDP growth rate for 2018 from 0.7% to 0.6%. Although this might seem like a slim adjustment it is important to note that the knock-on effects are far greater.
“Market fluctuations over a long-term investment period are inevitable, cyclical economic patterns certainly occur and at times display negative trends, however recent decisions by Government and its stakeholders could have far longer lasting repercussions on our economy.
“The impact of continual financial pressure on a straining consumer could potentially have devastating effects on economic participation. This has already started resulting in an extended negative period for the man on the street and the ability to recover from these pressures and then return to a positive attitude toward investment action could take a long time.
“It is imperative that we restore consumer confidence and avoid burdening South Africans with perpetual rising costs. “
Adrian Goslett, RE/MAX of Southern Africa, CEO
“It is disappointing, but not unexpected that the MPC has chosen to increase rates at this meeting. The challenge now falls onto consumers who are already pinched by rising fuel costs, a weakening economy, and a month of increased expenses to keep up with the payments on their home loans and not fall behind on any other credit repayments,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
“As difficult as it may be, consumers will need to practice careful financial discipline to make sure they get through this Christmas season without leaving a dark mark on their credit record. Falling into arrears on your home loan is a dangerous slide towards financial ruin. If you are really struggling to keep up with your payments, perhaps consider renting out a room in your home if you have the extra space.
Alternatively, you should consider downscaling, but this should be done before you reach a dire point in your finances which would lead you to accept low-ball offers out of desperation,” Goslett adds.
“For those who are delaying entering the market owing to the possibility of interest rate hikes, I would advise that they reconsider. Over the course of a twenty or thirty loan term, interest rate changes are inevitable and cannot be avoided. Much like annual rent increases, interest rate hikes are simply part of the risk of owning property. Waiting for ideal market conditions will delay your plans of entering the market, thereby delaying the time it will take for you to pay off your home loan and minimalizing the time you’ll have living in or renting out a property debt free and reaping the rewards of your investment,” Goslett concludes.
Rudi Botha, BetterBond CEO
For home-owners with bonds, the interest rate increases announced by the Reserve Bank today will add at least R16,60 per R100 000 borrowed to their monthly repayment, according to BetterBond, SA’s biggest bond originator.
“So on a 20-year loan of R1m, for example, the monthly instalment will rise by at least R166 and possibly more, depending on the current interest rate that the borrower is paying,” says BetterBond CEO Rudi Botha.
What is more, Botha notes, the January increases in everything from school fees to medical aid subscriptions are not far off, “so we are really urging consumers not to overspend or run up any more debt in the next few weeks – even if it means ‘missing out’ on some enticing Black Friday deals and seasonal special offers.
“In addition, we strongly suggest that if you do get a bonus this December, you use it to reduce whatever debt you have. If you are a home-owner, for example, the best thing you can do with it is to put it straight into your bond account and reduce the capital portion of your home loan. You will really thank yourself next year when your monthly instalments are lower – especially if interest rates continue to rise, as many experts are now predicting they will.”
Herschel Jawitz, Jawitz Properties CEO
“The biggest challenge is that virtually all the pressure on inflation is supply driven, such as the weak exchange rate and increased cost of fuel. There is zero demand pressure on inflation. This extends to rental inflation which is part of the basket of goods and services used to determine the CPI numbers.
“According to the latest FNB Property Insights report, the actual increase in year-on-year rentals is just over 4% but the escalation in rates and non-electricity utilities sits at a much higher figure of 11% – once again, a supply-side issue. The increase in rates will continue to contribute to a subdued residential market from a demand point of view. With inflation at 5.1%, property prices will continue to decline in real terms after inflation across most parts of the country which means that the current residential market offers the best value to buyers since the market crash in 2009 - for those buyers who wish to get into the market.”
Dr Andrew Golding, chief executive of the Pam Golding Property group
Dr Golding believes that with the rand strengthening and fuel prices dropping, it would have made sense to hold the repo rate stable, for now.
“A pause in the repo rate cycle would have helped stimulate economic confidence and provided some relief to consumers – particularly at a time of year when many are looking ahead to the holidays and planning for the year ahead as well as any home relocations due to a change in career or lifestyle.
“Clearly however, there are still inflation risks which may incline the MPC towards continuing on a modest hiking cycle in the New Year, particularly as the rand remains vulnerable to shifting investor sentiment and monetary policy tightening in the developed world. It would thus be wise for home buyers – particularly first-time purchasers –to factor this in along with the other costs associated with acquiring residential property.”
Stuart Manning, CEO for the Seeff Property Group
“Even with this hike, the interest rate is still at some of the best levels in years and the Seeff Group does not expect much of an impact on the property market. The bigger impact is coming from the socio-economic environment and only once some these are resolved are we likely to see the next upward phase.
“While we are looking forward to a much improved 2019, the reality is that with the General Election scheduled for May, it is likely that any uptick will only really be seen from around mid-2019. We are therefore likely to kick off 2019 on much the same foot as we are now and will need to be patient for a while longer.
“Once the May General Election is out of the way and if we get a positive result that reinforces a mandate to President Ramaphosa to continue his reforms, we will see this translate into more positive sentiment, so critical for the economy and property market.
“The president has demonstrated his commitment to rooting out corruption and maladministration and returning to good governance. Recent successes with his investment drive adds further to the positive outlook.
“Conditions remain favourable for buyers who are able to find good value given the flat price growth and rising stock levels, but don’t wait too long.
“All economies and property markets go through cycles of ups and downs and many will tell you if only they had bought at a particular time. While price growth has flattened, there has been no price devaluation yet and it is still safe to invest in property.”