Latest Interest Rate Hike - Effect on the Property Market

Private Property South Africa
John Loos

The South African Reserve Bank (SARB) announced today that its policy repo

interest rate would rise by 50 basis points, after a brief pause at the January

Monetary Policy Committee (MPC) Meeting. This implies unchanged prime overdraft

rates for major banks.

With CPIX inflation near 10%, and this rate hike signalling the seriousness with

which the SARB takes its inflation targeting job, we are definitely not out of

the “danger zone” yet with regards to risks of further rate hikes.

As such, it is advisable to proceed with caution when involving oneself in

home-buying, buying in a price range well-within one’s means. Scenario planning

to allow for the possibility of further interest rate hiking would be a good


The news is negative from a residential property market performance point of

view. Whereas we had expected rates to move sideways for the entire 2008, a

scenario which I believe would have led to a gradual recovery in residential

demand as from mid-year, such a recovery has in all probability been delayed

considerably, and it will take substantially longer for household confidence to

start recovering.

I believe that today’s development begins to raise the possibility of a small

period of national house price deflation, which under a sideways rates scenario

I believe would have been narrowly avoided.

When splitting up the market by price category, I believe that the combination

of rate hiking and high food price inflation will bring the superior performance

of the lower-priced end to a close. Lower income groups face the “double-whammy”

of rising interest rates as well as high food price inflation. Food price

inflation affects lower income households worse because it consumes a higher

portion of their total income.

Strongly holiday property-driven areas are probably also in for a more torrid

time until such time as the interest rate cycle clearly turns.

The total impact on home loan repayments since the start of rate hiking in 2006

is now becoming more than significant.

On a R1million house the cumulative impact of 450 basis points worth of hikes is

an increase in the monthly repayment value by R3,184.

Every event brings good news, however, and the good news in this case is for the

rental market and existing landlords. FNB’s rental property barometer has

already been pointing towards a recovering rental market, and I believe that in

the current environment of uncertainty and negativity the resumption of rate

hiking will be an additional boost for rental demand.

Many potential first time buyers would probably want to delay buying, continuing

to be tenants for a little longer, while buy-to-let-buying will probably

deteriorate further on the news, constraining the supply of new rental stock.

The combination of constrained supply and strengthening rental demand is a great

recipe for rental market recovery, and I believe that 2008 will see a

considerable widening in net income yields on letting property stock.

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