Higher than expected rate increase predicted

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

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 explained the average price of a new home was currently around R1.25 million, and that, using this price and loan term of 20 years as a basis, a 0.75% increase in the interest rate would 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 R1050 in their repayment amount early next year.

“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 interest rate hikes had 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 the “shortterm pain” would help mitigate rising inflation.

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

FNB Senior Economist Siphamandla Mkhwanazi predicted a moderate interest rate cut in the first quarter of 2023.

However, the steeper-than-expected interest rate hikes and slower aggregate wage growth meant that housing affordability was becoming more stretched, suggesting the market would 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 showed there were four key factors that 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 added 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.”