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Interest rate hike ’premature’ - property experts

The interest rate increase of 0.25% will affect homeowners' pockets slightly.

The interest rate increase of 0.25% will affect homeowners' pockets slightly.

Published Jan 27, 2022

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Today’s decision by the Monetary Policy Committee (MPC) to increase the interest rate by 0.25% was expected, but some property experts do not believe the hike was necessary – not yet, anyway.

“I do think this latest increase was premature,” says Tony Clarke, managing director of the Rawson Property Group.

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“Our economy is already under severe pressure. We’ve only just been upgraded from junk status by certain rating agencies, and we have a long way still to go in terms of recovery.”

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The extended period of record-breaking interest rate lows, he says, has been pivotal in helping the country ride out the pandemic so far – largely because of its impact on property. And this is because the property is a significant contributor to the GDP.

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“The buoyancy it experienced as a direct result of the low-interest rates has played a critical role in keeping our economy afloat over the last two years. Any impact on that buoyancy will also impact our economic recovery. That’s not something we want to play games with in our present situation.”

The interest rate is now 4% and at a prime lending rate of 7.5%, Carl Coetzee, chief executive of BetterBond says homeowners can expect to pay a R152 extra on a bond of R1 million.

“Of course this amount increases with the value of the bond...”

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Adrian Goslett, regional director and chief executive of Re/MAX of Southern Africa, was hopeful that the interest rate hikes would rather occur more gradually over the course of the year.

“Every time interest rates climb, home loans become that little bit more expensive,” he explains.

“This can affect activity within the housing market, as fewer people will be able to afford the repayments at the higher interest rate. Over time, this could mean smaller buyer pools and downward pressure on asking prices, especially if more homes enter the market owing to affordability issues.

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The more gradually interest rates climb though, the less of an impact it will have on the housing market as a whole.

“If interest rates had remained stable after the last interest rate hike in November, the MPC would have allowed homeowners and buyers time to adjust to the higher repayments that they faced on their home loans and other debt repayments. This second consecutive interest rate hike is likely to dampen demand among buyers and could also place many homeowners under pressure to keep up with their home loans.”

Following on from November’s repo rate increase, Andrew Golding, chief executive of the Pam Golding Property Group also hoped there would have been a pause in the upward cycle trend.

“However, with the December consumer inflation rate (at 5.9%) close to the upper limit of the Reserve Bank’s inflation target, and with local risks to the inflation outlook firmly on the upside – the MPC was likely to take this decision to increase rates now.

“Notwithstanding this, the interest rate will hopefully increase slowly and over an extended period of time.”

Although Herschel Jawitz, chief executive of Jawitz Properties says that today’s rate increase will have a “marginal effect on the market”, the prospect of further rate increases this year will eventually start to impact on demand at the lower levels of the residential market especially first-time buyers.

“Since rates fell by 30% to 7% in 2020, a significant portion of the activity in the market has been in the first-time buyer category, supported by a positive lending environment and sluggish price growth, which made for the best buying market in at least a decade.”

Still reason to be optimistic

But even with the latest rate increase, he says rates are still 2.5% below where they were in March 2020. And even if they rates go up to 8% by the end of the year, by South African standards they are still low.

“Our residential market, while still above 2019 levels, hasn’t experienced the same price growth that other markets such as the USA and UK have seen during the Covid pandemic, where they were also driven by low rates and positive bank lending. South African residential property remains undervalued and still offers excellent value.”

Leadhome Properties’ chief executive Marcél du Toit does not believe that the rate increase will have much impact on the residential property market, particularly as prime interest rates are still attractive and repayment increases remain marginal. Rather, other factors like inflation, load shedding, and consumer confidence, are more likely to influence people’s decision to invest in a property or not.

Clarke may not be welcoming of the interest rate increase but he agrees that South Africans and their property market are both extraordinarily resilient – as long as future interest rate increases are made slowly and kept low.

“We’re expecting to see at least five different rate hikes for this year and we expect this to be done responsibly and slowly, with small increases of 25 basis points each time, so that it would not put any additional stress on the economy.”

If this is the case, the property market should be able to absorb the hit and continue on a positive trajectory, he says.

Coetzee agrees: “While today’s decision to push up the repo rate by a further 25 basis points will mean a slight increase in monthly bond repayments, it won’t have a significant immediate impact on the housing market which has shown remarkable resilience during the pandemic.”

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