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Rate hikes spell trouble for property, economy

Further interest rate hikes are particularly concerning for the property market. Picture: Caleb Oquendo/Pexels

Further interest rate hikes are particularly concerning for the property market. Picture: Caleb Oquendo/Pexels

Published Jul 26, 2022


Last week’s interest rate hike of 0.75% was an unwelcome surprise for many who were bracing themselves for a 0.5% increase.

But the news that further interest rate hikes are expected this year is “particularly concerning” for the property market, says Samuel Seeff, chairman of the Seeff Property Group.

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“While we understand the need for a rate increase, we believe that a 50bps hike could have been adequate. It may appear easy to say ‘let’s fight inflation with an interest rate hike’, but this may not have the desired effect as we are not talking about demand-driven inflation, but mostly imported inflation caused by external factors (such as oil prices and the Russia-Ukraine War).”

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Consumers, he says, now have to absorb the higher-than expected-rate hike on top of significantly higher costs of fuel, food and living, while many industries, including real estate, will also be significantly impacted.

“While the historically low rates of the last two years have been great for the residential property market, the overall uptick in transaction volumes was not as high as we would have expected given that the 30% reductions took the interest rate to the lowest level in over five decades.

“Sales volumes peaked at just over 21 000 per month on average in 2021, well short of the highs of the mid-2000s boom period when volumes were in the upper 30 000s on average, and the interest rate much higher.”

Seeff explains that a healthy and active property market is vital to the economy, and that an interest rate shock could impact not just transaction volumes, but have a further economic knock-on in terms of property taxes (transfer duty, rates and taxes, VAT and CGT) and company and personal income tax contributions.

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As an example, he cites a study done for the industry by Professor François Viruly from the Urban Real Estate Research Unit at the University of Cape Town, that showed that residential real estate creates just over three direct and indirect employment opportunities for every R1 million of output generated.

Another “massive benefit” of the low interest rate of the last two years is that it enabled more first-time buyers to get into their own homes, many of whom are from previously disadvantaged backgrounds.

Seeff’s conclusion is that the Reserve Bank has “perhaps taken a one dimensional approach to a multi-dimensional problem”.

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“We are in unprecedented times, and call on the Bank to minimise further rate hikes.”

The 0.75% hike will be a “significant blow” to South Africans already battling a tsunami of food, transport and utility cost increases, agrees High Street Auctions Director Greg Dart.

“The effect of the highest rate hike in nearly two decades is going to have a domino effect on the economy, with inflation putting massive pressure on the private sector as wage expectations rise in line with the cost of living.

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“The Reserve Bank’s move to suppress economic demand and protect the currency in the global context is perfectly understandable and reasonable, but at the same time, with the basic cost of living rising so fast, business under such pressure and unemployment figures being what they are, there has to be a balance.”

Therefore, the hike should not have been more than 0.5%.

Dart says the increase is also likely to damper the country’s vibrant property market, which contributes substantially to GDP.

“Suppressing economic demand as a short-term measure is laudable, but because prices that have gone up never again come down, the effect on profitable sectors of the economy such as real estate is longer term; it won’t recover overnight.

“Put simply, you can’t throw out the baby with the bath water. There has to be middle ground, but that’s unlikely for the remainder of the year with more rates hikes forecast and the already devastating impact of Eskom on business activity.”

Richard Gray, chief executive of Harcourts SA, believes it is “disappointing” that the South African Reserve Bank chose to raise interest rates as a counter to inflation, when the real reason for the high inflation is the fuel price and not consumers overspending.

“This, paired with high inflation levels, makes it very difficult for the average South African to stay afloat.”

He adds that economic fluctuations are “worrying” and says Government has a responsibility to absorb the adverse effects these elements have on its citizens.”