Homeowners, hang in there.
The country seems to be at the end of its interest rate hiking cycle, and even if there is an increase this month, it is expected to be the last.
And next year, the rate could even start coming down, economists and property experts say.
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Harcourts South Africa is anticipating that the South African Reserve Bank (SARB) will either not increase the interest rate this month, or put it up by just 0.25%, says chief executive Richard Gray.
“We believe that the upward interest rate cycle is reaching its end, and that further increases could have a negative impact on our struggling economy.”
Furthermore, he says, while the recent weakening of the Rand has made it less certain that there will be no change in interest rates, “we remain hopeful that a decision to hold interest rates steady would be good news for consumers who have been dealing with a lot of negative economic developments lately”.
“Such a decision would also help to improve consumer sentiment, which is always positive for the housing market.”
Reading from the lower-than-expected repo rate increase in January 2023, Thulani Vilakazi, chief executive of Ithala SOC Limited, believes that the next Monetary Policy Committee (MPC) decision will be to keep the repo rate unchanged at 7.5%, which will see the prime lending rate remain at 10.75%.
“The inflation-targeted repo rate increase that has been noted since November 2021 is expected to have normalised now.”
Leonard Kondowe, national manager for Rawson Property Group Finance, says the SARB will intend to curb inflation against the backdrop of rising fuel costs, the current energy crisis, rising unemployment, and poverty rates that are leading to an economic downturn. For this reason, he expects that the interest rate will rise again this month, either by 0.25% or a maximum of 0.5%.
Echoing this, Carl Coetzee, chief executive of BetterBond, is expecting the SARB to “ease off a little” and possibly only increase the repo rate by 0.25% at the end of March. He says the Bank, in line with international trends, has been increasing the repo rate in a bid to curb inflation.
“In South Africa, inflation is still outside the acceptable 3% to 6% range, so interest rates are likely to increase slightly, but then we expect them to hold steady towards the end of this year and into 2024.”
FNB property economist John Loos says the Bank has pencilled in a 0.25% repo rate increase later this month, which will take the repo rate to 7.75% and the prime lending rate to 11%. And this would still be fair as it is “important to normalise interest rates”.
“What people don’t realise is that interest rate hikes do not only affect debt, they also affect savings...It is important for the Reserve Bank to guard against macro-economic imbalances such as the housing bubble trap that we fell into during 2020.”
He further explains that the interest rate cuts in 2020 were abnormal due to an abnormal crisis, and while higher rates leave some people disappointed because there is then reduced demand for property, for example, rate hikes are important for long-term health as they prevent increased income-to-debt ratios.
“We must remember the big elephant in the room which is the huge level of debt here and all over the world. If we keep the interest rate under control it boosts savings rates.
If the interest rate is increased to 11%, Loos states that this is not high given the country’s inflation rate.
“We don’t want to fuel the ‘buy now, pay later’ trend. Not hiking the rate makes credit cheaper and fuels borrowing, and this is not good in the long term. Pre-2008 there was a housing bubble, but this was followed by a lot of financial pain. The interest rate plays an important role in keeping indebtedness levels manageable.”
Impact of rate hikes on homeowners
If the interest rate rises by 0.25%, Coetzee says it means homeowners would need to pay “slightly more” into their bonds each month. However, there is some comfort to be taken from the fact that the country is “most likely very near” the peak of this current rate-hiking cycle.
“Market activity has certainly slowed slightly, but there are still opportunities for aspirant buyers, and some provinces are showing positive house price growth. Affordability should always be the biggest consideration when owning a home, regardless of where we are in the interest rate cycle.”
The rising interest rates are definitely eating into consumer affordability, Kondowe says.
“Between the rising cost of things like credit card debt and vehicle finance, the increasing expense of fuel and groceries, and poor salary growth, it’s no surprise that South Africans are feeling the pinch. This hasn’t only affected new bond applicants, but also those paying off existing home loans.
“As bond originators, we’re sometimes able to advise struggling bondholders on ways to restructure their personal finances to free up capital for their bond. When this isn’t possible, or the results aren’t significant enough, it’s essential that bondholders approach their lenders directly, and as quickly as possible.”
He adds that consumers should save money and do as much as they can to reduce existing debt or lower their monthly expenses so that they can comfortably pay their monthly bond installments.
Vilakazi says the current prime lending rate of 10.5% has not been seen since 2016, and so the impact of the higher rate “will be felt by homeowners for months to come”.
“For instance, a home loan of R1 million in September 2021 at prime (7.75%) cost a homeowner about R8 646 per month, and 16 months later in February 2022, at the current prime rate of 10.75%, it costs an additional R2 000+ per month.
“This increase in interest rate is not limited to home loans, but other interest-linked products such as credit cards, overdraft facilities, personal loans, and revolving Loans. This then leads to a reduction in disposable income, which leads to financial strain on middle- to low-income households.”
If the interest rate remains unchanged, however, Gray says it would signal that the recent cycle of increases is over for now. And this would be “a welcome development” for the housing market as it would provide greater stability and certainty for homeowners, buyers and sellers.
“Additionally, I believe that a decision to hold interest rates steady would be particularly beneficial given the challenges facing our power utility Eskom, as well as the low levels of economic growth.
“By keeping interest rates steady, the South African Reserve Bank would be sending a strong message of support for our struggling economy and property market.”