Potential impact of raised interest rates on the property market

As widely predicted, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) last week decided to lift its policy repo rate from 6.5% to 6.75%. This will lead to commercial banks increasing their prime lending rate from 10% to 10.25%.

John Loos, property sector strategist at FNB Commercial Property Finance, says the Firstrand economics team had expected the hike interest rate hike, although it had been a close call, with the economy weak, the rand reasonably well behaved recently, and CPI inflation still well within the target range.

“The SARB acknowledged an improved inflation outlook since the previous MPC meeting, given a mildly stronger rand and lower oil prices of late, but remains focused on second round inflation effects that can emanate from the prior oil price spike and rand weakness,” says Loos.

“The forecasts CPI inflation rising to 5.5% in 2019, up from a forecast 4.7% for the current year. Such a forecast for 2019 is still within the 3-6% target range, but the MPC noted that this would be above the mid-point of the target range.

“Coming at a time when the economy is very weak, the decision is likely to dampen confidence in the property market further, sustaining the gradual correction in the market.”

Loos believes the property market is likely to see confidence levels deteriorate. Although one 25 basis point rate hike makes little difference in rand terms, it comes at a bad time given that SA is into the seventh year of broad economic stagnation, and the property market has been gradually feeling increased pressure. The rate hike is thus likely to contribute the property market correction continuing.

The all commercial property vacancy rate and commercial capitalisation (Cap) rates are likely to continue to rise in the near term.

“The rising Government Debt-to-GDP Ratio, along with the expectation of further short term rate increases next year, is expected to gradually drive long bond yields higher, while rising vacancy rates should also to play a role in taking cap rates higher.

“The rate hike decision, in the current weak economic environment, is thus likely to keep property values declining in real terms, with “real” referring to property price growth adjusted for general economy-wide inflation.

“Although financial stress levels in the property market appear relatively low still, there has been a recent mild increase observed, and this is expected to continue subsequent to the rate hike decision.”

Herschel Jawitz, chief executive of Jawitz Properties, says 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, says that for homeowners with mortgages and credit debt, as well as aspirant home buyers, the news of the increase was not what they wanted to hear.

“With October’s inflation of 5.1% in line with expectations – slightly higher than September’s 4.9% yet still within the 3-6% target range, and with some relief in the fuel price expected in December as a result of the oil-price slump, coupled with a stronger rand and against the backdrop of a tepid economy, it would have made sense to hold the repo rate stable, at least for now,” says Golding.

“Indeed, the current recovery in the rand, coupled with the recent slump in the oil price, suggest that the local inflation outlook has improved somewhat, potentially easing pressure on the MPC to begin hiking interest rates in the near-term.”

Golding believes 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 forward 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 therefore be wise for home buyers – particularly first-time buyers –to factor this in along with the other costs associated with acquiring residential property.”

Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, says: “It is disappointing, but not unexpected that the MPC chose 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.

“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 says.

For home-owners with bonds, the interest rate increases announced by the Reserve Bank will add at least R16.60 for each R100 000 borrowed to their monthly repayment, according to bond originator BetterBond.

“So on a 20-year loan of R1 million, for example, the monthly instalment will rise by at least R166 and possibly more, depending on the current interest rate the borrower is paying,” says BetterBond chief executive Rudi Botha.

“And the interest rate decision will also mean higher monthly repayments on every other form of debt, including car finance, credit cards, store accounts and personal loans.”