Interest Rate Hikes

Private Property South Africa
Jacques du Toit

Jacques du Toit, Senior Property Economist of the Absa Group looks at how higher interest rates are influencing the housing market.

The SA Reserve Bank's (SARB) Monetary Policy Committee (MPC) announced on 3

August a further hike of 50 basis points in the repo rate to a level of 8%. The

previous increase in interest rates was on 8 June this year. As a result,

commercial banks announced that their lending rates to the public, i.e. prime

and mortgage interest rates, were to increase by the same magnitude at both


Reasons mentioned by the MPC for the August rate increase include inflationary

pressures present in the economy at the time, such as high international oil

prices, which led to sharply higher domestic fuel prices, increasing food prices

and a volatile rand exchange rate. Against this background, PPI inflation jumped

to 7,5% in June (5,9% in May), while CPIX inflation increased to 4,8% in June

(4,1% in May). Increasing levels of household debt as a result of continued

strong credit extension, as well as the huge deficit on the current account of

the balance of payments also still concern the MPC.

[Click here to view the monthly

mortgage repayment (calculated over a period of 20 years)](

CPIX inflation is expected to break through the upper target limit of 6% in the

first quarter of 2007. In an effort to contain inflation, we forecast interest

rates to be hiked further this year by 50 basis points at both the remaining MPC

meetings in October and December. This will bring banks' prime and variable

mortgage rates to a level of 12,5% by end-2006.

In view of further interest rate hikes expected in the rest of the year and the

impact this will have on the housing market, our projection is for nominal house

price growth to continue declining from 13,5% year-on-year recorded in July to

about 7% in December. Taking into account that average house price growth of

15,2% was recorded in the first seven months of the year, average price growth

of between12% and 13% is projected for the full year. For growth in house prices

to dip into single digits for 2006 on average, prices will have to decline

sharply over a wide front towards year-end. However, this is not a scenario that

is currently envisaged.

In view of the ratio of household debt to disposable income at relatively high

levels (68,2% in the first quarter of 2006), the further increase in interest

rates implies that debt servicing costs will rise at a faster pace. As a result,

many consumers, property investors and speculators will consider fixing the rate

on their mortgage loans in an attempt to limit the negative impact of further

interest rate hikes. Factors such as the outlook for interest rates, the period

of a fixed rate loan, the loan amount and the loan-to-value ratio, will

determine the level of fixed rates and thus the appetite for fixed rates on


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