Much has been said about South Africa reaching the peak of its current interest rate cycle, but there is a strong possibility of an interest rate hike at the end of this month.
Property experts are predicting a hike of 0.25% – or 0.5% at the most, and if this materialises then it could be another nasty shock for consumers.
There is still some hope the rate could be unchanged, but as was seen last month, one will never really know until the announcement is made.
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FNB’s view is interest rates have reached their peak level and so will remain unchanged “from here onward until well into 2024”, says property economist John Loos.
“Therefore, in the near term, we don’t expect any change in the direct impact on the cost of servicing mortgage debt for existing property owners.”
Nick Tyson, managing director of Tyson Properties, also does not believe the interest rate will be hiked, but states, if it is, it will be by 0.25%. Tyson chief executive Nick Pearson does not predict an increase this month either, but “will not be surprised if we see another increase this year”.
And this is where the positivity ends. BetterBond shares the view of some economists and analysts the rate will be increased by 0.25%, taking the repo rate to 8% and the interest rate to 11.5%. But the good news, says chief executive Carl Coetzee, is “this is likely to be the last increase we will see in this current rate-hiking cycle”.
“It is expected that inflation is unlikely to remain about the Reserve Bank’s upper target range for much longer, so we should see a lowering of interest rates in the second half of this year.”
If his hike prediction comes true, homeowners will unfortunately have to pay more on their monthly bond payments.
“On a R2 million home, a 0.25% increase will push the prime lending rate to 11.5%, adding R344 to the monthly bond payment. This means that, for a 20-year bond, the monthly repayments will increase from R20 985 to R21 329.
“Should the repo rate increase by 0.5%, these homeowners (of a R2 million home) will have to pay almost R700 more each month on their bond.”
Coetzee says an increase in the repo rate will negatively affect homeowners, especially in an economic climate where fuel, electricity and living expenses are also on the rise. But, South Africans must take a long-term view when it comes to the housing market and buying property.
“The Reserve Bank acted swiftly to curb inflation by starting to increase interest rates in November 2021 already, and forecasts indicate that this could be the last increase for a while. The strong possibility that interest rates are likely to drop during the second half of this year will bring homeowners welcome financial relief.
“Affordability is always a consideration when buying a home, and homeowners are advised to budget prudently and factor possible interest rate hikes into their calculations when applying for a bond.”
Agreeing with Coetzee, Tyson says any increase in interest rate will be viewed very negatively by homeowners as they are “already under extreme pressure due to the numerous other increases we have seen in the cost of living over the past year”.
Many homeowners would be negatively impacted as they are under pressure, states Pearson.
“On a positive note, many areas where homes on the market are overpriced will need to adjust their pricing and this will bring prices back in line with the current demand.
“We would encourage people wanting to invest in properties to make sure they have at least a 10 percent deposit and the transfer duties. We would also recommend that people look at all the costs involved on a month-to-month basis...”
Reserve Bank governor Lesetja Kganyago, recently said the widely-held belief was not that curbing inflation would be more harmful than hiking the interest rate in the long term, so Yael Geffen, chief executive of Lew Geffen Sotheby’s International Realty believes “we can certainly expect another bump of 0.25% to 0.5%”.
“That said, in a country like South Africa with very high unemployment and rampant food inflation, I believe it’s almost criminal to not try and curb inflation.”
She adds: “As a nation we are in the highest food inflation cycle in since 2009, we’re at the highest prime lending rate since 2009, and if the economy continues to shrink, we’re going to be in a deep recession from which it will be very difficult to recover.”
Some people, Geffen says, are already spending up to 60% of their salaries servicing debt, and each time the interest rate rises, so does the struggle to service debt. More money then has to be borrowed and it becomes a vicious debt cycle.
“This does not bode well for a market which has been under growing pressure for some time. We are seeing an increase in distressed sales by homeowners who are no longer able to service their debt and are forced to sell and, although it’s happening across the board, it’s most prevalent at the lower end of the market which is already struggling to survive.
“Nobody is getting salary increases that can accommodate R5 500 worth of monthly mortgage repayment hikes in 18 months, which is currently the case for every household in the country right now servicing a R2 million bond.”
Following the March 2023 rate increase of 0.5%, says Richard Gray, chief executive of Harcourts South Africa, most analysts believed the country was at a turning point with headline inflation close to the target band. However, given the surprisingly high CPI figures in March, mainly fuelled by food inflation and transportation, the MPC of the SA Reserve Bank “probably has no choice” but to seriously consider another rate increase of 0.25% at the end of May.
“An increase of 0.5% on the back on the March increase will be too aggressive.”
He says homeowners that are bonded will be further negatively impacted by another interest rate increase as it will place an additional burden on households’ cash-flows and general affordability, especially those bonded homeowners that are fighting to make ends meet every month.
“The rising cost of living is coming at the general public from all angles and most people are struggling. Bonded home owners make up roughly 30% of all property owners in South Africa. It might push some homeowners over the edge of affordability, forcing them to sell.”
Even if the interest rate is not hiked, Loos says it was likely some increased financial pressure on a portion of property owners will be witnessed in the near term. This would be the lagged impact of what are now sharply higher interest rates compared with a year to two years ago.
“From 2% growth in 2022, the economy is forecast to slow to 0.1% for 2023. This hampers household income growth at a time when the cost of debt servicing is elevated. And in a weaker economy with now higher interest rates, which also results in a weaker property market, it becomes a bit tougher to offload properties pro-actively when an owner is under financial pressure.
“So, while we expect interest rates to remain unchanged, one must take into account the lagged impact of recent rate hiking, and at a time when the economy is under pressure. I expect things to still become tougher for property owners in the near term before they get better.”
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