The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) announcement that the repo rate is to increase by 50 basis points was not a surprise for the property industry.
At its previous meeting in March 2022, SARB 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. Therefore, increases have been widely expected as part of the post-Covid interest rate normalisation trend. As a result, economists predict several more hikes this year, with the prime widely expected to reach 9.5% by December.
In his May statement, Kganjago cited various factors that affected the SA economy and influenced the committee’s decision to hike the repo rate. These included the Omicron variant, which has affected the whole world and the war in Ukraine.
“The economic costs of Covid generally continue to fall, as most economies remained open despite the rapid spread of the Omicron variant. The sustained invasion of Ukraine by Russia and China's response to the new outbreak will, however, weigh heavily on global economic growth and contribute to higher inflation,” said Kganjago.
“The war has impaired the trade and production of a wide range of food, energy and other commodities and will continue to do so for some time. As a result, the International Monetary Fund (IMF) reduced its global growth forecast for 2022 to 3.6%.”
He said the SARB revised its forecast for global growth in 2022 to 3.5% - down from 3.7% at the March meeting. For 2023 growth is lowered from 2.8% to 2.7%. For 2024, global growth will remain unchanged at 2.7%.
The governor said that dramatically higher oil, commodity and food prices, additional constraints on trade and finance, as well as rising debt costs had created worsening economic conditions for most developing and emerging economies.
Industry response
Tony Clarke, Managing Director of the Rawson Property Group, says: "We were hoping for a more moderate 25 basis point hike, but the 50-point increase wasn't entirely unexpected. Between the rising international interest rates, weaker rand and massive fuel price hikes on the horizon – which will likely push inflation over the SARB's 6% upper limit – there was little else the MPC could reasonably do."
He says there is always hope for a reversal of the upward trend and expects the effect of the current increases on the property industry to be noticeable but not catastrophic.
“We expect a slight drop in demand with a corresponding increase in stock levels,” he says. "Buyers will be extremely cost-conscious and demanding and not afraid to negotiate. Sellers will need to take this into account when positioning their properties, leaning on the skills of property professionals to compete effectively.”
Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, hopes that homeowners have planned for these interest rate hikes and have already made room in their budgets to afford the slightly higher debt repayments.
“There are so many unknown variables around interest rate fluctuations that it is impossible to tell with absolute certainty whether fixing your interest rate now will be more beneficial for you in the long run,” says Goslett.
He says rising interest rates also pose challenges for real estate agents as buyers become more hesitant. However, he advises agents to remind buyers that prime was at 10% before the Covid-19 pandemic, so interest rates are still relatively low despite this year’s interest rate hikes.
Lew Geffen Sotheby’s International Realty chief executive, Yael Geffen, says the repo rate increase of 50 basis points will affect all South Africans.
"South Africans are being squeezed from all sides, and there just isn't that much room in the economy. Home repayments for a R2 million bond at prime rate will increase by more than R600 a month with this increase. The housing market is still buoyant, but buyers need to budget carefully. We expect at least one more rate hike this year, so purchases should be made with that in mind.”
The managing director of the RealNet estate agency group, Gerhard Kotzé, says that homeowners should find it easier to upgrade to a better or bigger property following the interest rate increases announced after the MPC’s last four meetings.
“The effect of rate increases generally is to lower demand, increase the supply of homes for sale and prompt home sellers to rethink their selling prices – in that order. And as the market is currently experiencing these shifts, this is the right time for upgrading buyers to seize their opportunities.
“In addition, thanks to the huge influx of first-time buyers, prices have been rising faster at the lower end of the market than at the upper end for most of the past two years. This creates the opportunity for astute owners to move up the property ladder by selling their first homes at a substantial profit. They can then use most of this as a deposit on their upgrade home to lower their bond requirements – and repayments.”
Berry Everitt, chief executive of the Chas Everitt International property group, says: “When the US, the UK and other First World countries raise their interest rates - as they have done lately for the first time in years – investors tend to lose some interest in emerging economies like SA, and that has a negative effect on the rand.
“On the other hand, raising our interest rates at the same time keeps money flowing into the country, bolsters the rand and keeps the prices of fuel, food and other goods lower than they might otherwise be, which is good for us all, even if it is tough on those with debts to pay off.”
Dr Andrew Golding, chief executive of the Pam Golding property group, says: “We hoped the repo rate would be increased by 25 bps, rather than the 50 bps widely forecast. In addition to the weak economy, the case for hiking by only 25 bps was further supported by the fact that core inflation remains below the mid-point of the SARB’s inflation target - at just 3.9% in April. Headline inflation remained unchanged at 5.9% last month, which was marginally below market expectations and just within the upper limit of the inflation target.
“The impact on South Africa’s residential housing market is not expected to be significant, especially as this is still the lowest level of prime interest rate - now 8.25%, up from 7.75% - in more than two decades. After all, the prime rate was 8.5% between July 2012 and December 2013. For a home buyer with a bond of R1m over 20 years at a prime rate of 8.25%, bond repayments will increase from R8 209 a month to R8 521.”
Samuel Seeff, chairman of the Seeff Property Group, says: “The residential market continues to hold up well with buyers showing strong confidence. Although homeowners and buyers need to adjust to higher home loan repayments, the interest rate should remain below the pre-pandemic levels. Beyond the further 100 bps, we don’t anticipate any further impact on the interest rate.”
Seeff says it is still an excellent time for buyers and sellers to take advantage of the conditions. As the banks continue competing strongly, home loan finance is becoming more accessible, making the deposit requirements as low as 6% to 7%.
As a result of the latest rate hike, and based on a housing bond at the base rate of over 20 years, Seeff says homeowners and buyers will need to budget for higher monthly repayments as follows.
- On a R750 000 bond, repayments will increase by R233 from R6 157 to R6 390.
- On a R900 000 bond, repayments will increase by R280 from R7 389 to R7 669.
- On a R1m bond, repayments will increase by R312 from R8 209 to R8 521.
- On a R1,5m bond, repayments will increase by R467 from R12 314 to R12 781.
- On a R2m bond, repayments will increase by R622 from R16 419 to R17 041.
- On a R2,5m bond, repayments will increase by R778 from R20 524 to R21 302.
Carl van den Berg, Business Development Executive at Private Property, says that the 50-basis point rate hike was not wholly unexpected. He doesn't expect it to have much impact on the property market.
“Home loan finance is generally very accessible at the moment as the banks have been competing strongly, and we expect this to continue. Interest rates are still very low compared to the pre-Covid period, and properties that are marketed at the right price should still be selling within very reasonable timeframes. Overall, this is a positive trend.”