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Homeowners, be prepared: Rate hike could be higher than expected

Interest rates could be hiked higher than expected this month. Picture: Mohamed Hassan/Pixabay

Interest rates could be hiked higher than expected this month. Picture: Mohamed Hassan/Pixabay

Published Nov 19, 2022


Economists and property experts have been predicting an interest rate hike of 0.5% this month, but there is a chance it could actually be 0.75%.

By the end of January, after that month’s hike, the interest rate could reach 11%, says Nondumiso Ncapai, managing executive at Absa Home Loans.

“We forecast further hikes of 75bp by the South African Reserve Bank (SARB) this month and 50bp in January, taking the repo rate to 7.50%.”

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Whatever the repo rate is, the prime lending rate of the banks is 3.5% higher.

Asked what effect this will have on homeowners, Ncapai explains that the average price of a new home is currently around R1.25m, and that, using this price and loan term of 20 years as a basis, a 0.75% increase in the interest rate will result in an increase of approximately R620 in the required repayment by year-end.“

“Considering the interest rate increases still anticipated to the end of January 2023, we anticipate that customers with the average loan amount should expect a total increase of R1 050 in the their repayment amount early next year.”

As interest rates rise, she says homeowners must account for these in the context of various other expenses related to the increasing cost of living, such as rising fuel prices, electricity costs and food prices. Homeowners should therefore plan to absorb the combined impact of these increases and consider:

  • Paying close attention to living costs and cutting back where possible in areas such as entertainment, clothing and travel
  • Reviewing or creating your budgets to track spending and identify opportunities to save.

Having said all of this, however, Ncapai says Absa believes that there will be a cumulative 0.75% of cuts in the second half of next year as inflation eases into the central bank’s target range.

Echoing this, Carl Coetzee, chief executive of BetterBond, says the SARB’s timeous response to inflation means we could see rates drop again towards the end of 2023.

There’s no denying that South Africans are feeling the pinch, and another repo rate hike this month will be our seventh consecutive increase.

“But it’s worth considering that the Reserve Bank responded quickly to signs of rising inflation by gradually increasing the repo rate from November 2021.”

This has enabled consumers to budget accordingly and prepare for the impact on their monthly bond repayments.

“While a pain point now for consumers, the Reserve Bank’s strong stance will actually spare further hardship later, as it should help to bring inflation closer to the midline target. Once inflation starts dropping, so too will the interest rate.”

Reserve Bank Governor Lesetja Kganyago said recently that interest rate hikes have been necessary to control inflation, and cautioned that further hikes would be considered to lower inflation. However, he told delegates at a lecture at Wits University that the “short-term pain” would help mitigate rising inflation.

Economist Dawie Roodt has said this means that “in a year’s time we could be talking about lower rates again”.

Coetzee says: “We need to also bear in mind that South Africa’s fiscal policy is sound, and despite global inflationary pressures - the IMF predicts that more than a third of the global economy will shrink in the next year - there are still opportunities for growth and investment.”

FNB Senior Economist Siphamandla Mkhwanazi predicts a moderate interest rate cut in the first quarter of 2023. However, the steeper-than-expected interest rate hikes and slower aggregate wage growth mean that housing affordability is becoming more stretched, suggesting the market will slow further in the coming months.

“Nevertheless, market volumes, property tax receipts, and mortgage extensions data suggest that the slowdown to date has been modest.”

FNB’s research shows that there are four key factors that have supported market resilience: the pandemic-induced changes in consumer preferences, the structurally improved affordability following decade-long real house price correction, credit availability, and a higher household formation rate.

He adds that annual house price growth moved lower in October, averaging 3% from 3.1% in September.

“Slower price growth from post-pandemic highs reflects relatively softer demand amid higher living costs and deteriorating affordability. Market volumes continue to soften, albeit modestly and are still above pre-pandemic levels.”

Lightstone’s October report is “cautiously optimistic” about market conditions, says Coetzee, explaining that while transfer volumes for 2022 are likely to be less than the 493 000 seen before the property market crashed in 2008, they will still match the 2021 Covid-bounce back.

“At an estimated 330 000, these volumes are well above the levels seen in 2017 and 2018. Furthermore, although the interest rate increases have affected affordability, especially at the lower end of the market, buyer activity in the luxury residential housing segment is back to 12%, a number last seen in 2015. Lightstone also reports that price inflation for all property bands has outperformed CPI since 2020, despite national year-on-year house price inflation having decreased steadily in the past year.

“The next few months will be challenging for consumers, but there’s light at the end of the tunnel when it comes to the residential property market. As soon as inflation starts levelling off, we should see interest rates drop as well,” he says,

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