Violent unrest in KZN and Gauteng unlikely to have any impact on next interest rate decision
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*This article first appeared in our Property360 digital magazine
The violent unrest that has been wreaking havoc across Kwazulu-Natal and Gauteng is unlikely to have any impact on the next interest rate decision.
And unless the situation carries on for a prolonged period, it will not affect the long-term outlook either, says FNB economist John Loos.
This is good news for home buyers and owners as he says the current forecast is that the interest rate climb over the next three to four years is expected to be “gentle”.
This means the monthly bond repayment on a R1.5 million property will increase only by about R600 between now and 2024, assuming the bank’s forecast plays out.
“We do not expect any movement now in the interest rates, and the unrest that is going on now is definitely not going to change that. It would have to carry on for a lengthy period of time to have that effect.
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“If the situation lasts just a few days and then calms down, then it will probably be business as usual.”
Although parts of the economy have taken a brief knock, Loos says this will not have an impact on interest rates unless it becomes more widespread. In economics, the unrest is referred to as a “risk factor”.
“It is something that we have got to acknowledge and it does create uncertainty about the outlook, but, as yet, it is too early to change any thinking with regards to the interest rates. And what impact it could potentially have is still unknown.”
FNB forecasts that by the end of this year, interest rates will probably have increased by just 0.25%.
“We don’t expect that hike this month, only later in the year, and then another two 25 basis points increases next year. The SA Reserve Bank will likely be a slow hiker, given that underlying inflationary pressures will not be too strong, and the economy is rather fragile after a lockdown year pounding in 2020.”
This outlook is a far cry from the country’s record prime rate of 25.5% in mid-1998 when, Loos says, the Reserve Bank was raising rates in a bid to support the rand value in one of its currency dips.
“In those days the Reserve Bank’s brief was the protection of the internal and external value of the rand.”
FNB has not forecast beyond 2024, when it expects the prime lending rate to have risen from the current 7% to just 7.75%.
This is good news for existing property owners as well as those who are looking to buy now while interest rates are low.
Illustrating the impact, Loos calculates that if one has a new 100% bond at prime rate on a R1.5m house now (7% prime), then, depending on how interest is compounded, the monthly instalment will be approximately R11 629 a month.
And if the rate reaches 7.75% in 2024, the repayment on this same property, and on the same terms, will be R12 314 a month.
By contrast, at the 1998 25.5% prime rate the monthly instalment on that home would have been R32 081. However houses were cheaper then.
“In those days, house prices were far lower than today, to a large degree because the interest rates were so high in the 1990s.”
In addition to rises in bond repayments, buyers of sectional title properties need to also factor in levy increases over the next few years when deciding how much to pay for a property in the current buyer’s market. But it is not easy to forecast how much increases will be, says Andrew Schaefer, managing director of Trafalgar Property and Financial Services.
“It is extremely difficult to generalise as properties perform and behave very differently in terms of cost escalations.”
Important variables include:
• Painted buildings versus face brick ones.
• The quality of the development, especially concerning waterproofing.
• Whether regular maintenance is done or not.
• Security provisions – big costs can be involved if security becomes an issue.
• Whether there is a swimming pool and whether the water pipes are galvanised or not.
A “broad average” though, would 8% to 10% annual escalation at least in the short-term while most buildings or complexes are still catching up with reserve fund savings.
Buyers of sectional title properties should ask to see the 10-year maintenance plan and the most recent audited financial statements, Schaefer says. This will indicate what the costs will be, and what reserves are available.
“The financial statements should be up to date and show whether there is a record of consistent maintenance.”
Other charges that will increase and need to be factored in when budgeting, are municipal rates and tariffs. Loos says in recent times the CPI for municipal rates and non-electricity utilities tariffs, as well as the CPI for electricity and other fuels (not vehicle fuel though), has been running at near 6%. Until two months ago the CPI was nearer to 3%.
“The rates and tariff indices have been far outpacing the CPI inflation rates, and I expect this to be the case in our forecast period to 2024, and likely beyond...I think the theme of rising faster than CPI for the foreseeable future is a realistic expectation. This would be a reflection of the dismal state of local government and parastatal finances.”
Right now everyone is taking advantage of the low interest rates, but they will inevitably rise, says Leonard Kondowe, national admin hub manager for Rawson Property Finance.
Therefore, before a buyer commits to the maximum bond that they can qualify for, he recommends they do a stress test by adding on another 2% so that, if there is an interest rate hike, they will still be able to afford to pay their mortgage comfortably and not fall behind as rates go up.
“Always try and accommodate potential future increases so that you can meet your other obligations as well. Obviously, the interest rates will gradually and slowly start going up by a 0.25%.”
Not only must buyers consider interest rate increases, and hikes in rates and levies, but they must make provision for inflation rate increases in order to sustain themselves throughout periods of increase.
“You must still be able to live well and cover your basic needs plus your monthly bond payments. You wouldn’t want to fall behind on any of these payments as this may have a detrimental effect on your credit score down the line.
“Try to do your calculations, look at your expenses closely to see what you can cut out to gain more savings.”
It is also in a buyer, or property owner’s best interests, to take advantage of the current interest rates to settle or close accounts so they can be in a better financial position at a later stage.