Prepare for more interest rate hikes
JUST when we thought next week’s expected repo rate hike of 0.5% was more than enough to deal with, economists predict that September and November will see hikes of 0.5% each.
This means that the repo rate will increase by 1.5% between now and the end of the year, taking the prime lending rate to 9.75%.
January 2023 is also expected to see a rate hike.
FNB economist Siphamandla Mkhwanazi says the risk of a less transitory rise in inflation, higher inflation expectations, and the more aggressive policy tightening in advanced markets should result in the South African Reserve Bank further front-loading interest rate hikes.
“We now expect 50bps hikes in July, September and November, bringing (the repo rate) to 6.25% by end of 2022. We pencil in another 25bps in January 2023, which will bring the terminal rate to the pre-pandemic level of 6.5%.”
Banks usually set their prime lending rates at 3.5% higher than the repo rate, so by the end of January next year, the interest rate will probably be 10%.
There is no denying that times are tough, says Carl Coetzee, the chief executive of Betterbond.
“The ongoing Ukraine conflict is having an impact on oil and fuel prices, and electricity prices have soared. This is as Eskom escalatesits load shedding schedule, disrupting businesses with a significant impact on an economy recovering from Covid.
“Affordability is always a consideration when buying a home, especially in the face of rising interest rates.”
Whatever the outcome of next week’s Monetary Policy Committee meeting, which could even see a hike of 0.75%, he says the message is clear: “Those who have the financial means to do so are advised to pay extra into their bond, if they can, to reduce the amount of interest payable over the whole loan period.
“Create a savings buffer, so that you have the financial reserves to manage rising prices – fuel, food and bond repayments – if necessary. Look at your household budget and cut costs to reduce monthly expenses.”
Echoing this, Adrian Goslett, the chief executive of Re/max of Southern Africa, says: “In times like these, we simply need to ensure that we put ourselves in the best position to take advantage of whatever situations with which we may be presented.
“Before we are hit too hard, set money aside to get you through the storm. That’s not to say the storm will hit but if it does, at least you will be prepared to weather it.”
Property market prospects
In the latest FNB Property Barometer, Mkhwanazi says the Bank’s Estate Agents Survey showed signs of a softening property market in Q2:2022, and that this is corroborated by the lengthening time properties remain on the market for sale.
“The survey shows souring sentiment in the Kwazulu-natal region, following the devastating floods. This, combined with the impact of riots in
July last year, should have a lingering effect on the KZN property market.
“The survey also shows renewed resilience in the affordable market, and this is corroborated by internal applications data.
“As argued before, we believe innovation should support activity in this market which, in the bigger scheme of things, remains under-served relative to the traditional market.”
While softer market activity was recorded in KZN and the Eastern Cape, the Western Cape reading remained unchanged from the previous quarter.
Surprisingly, the survey shows an improvement in Gauteng, supported by stronger buying activity in the affordable market.
“Activity softened across all the price segments that we track, with the affordable market faring relatively better in Q2:2022.”
Mkhwanazi says rising interest rates are reported as a key factor in determining agents’ expectations, followed by weaker economic outlook.
“Sales due to financial pressure are still elevated, at an estimated 20% of the market, while emigration-related sales remain stable at around 8%.”
The ratio increases to around 15% in the R2.6m+ segments.
“Relocation within South Africa has increased from 8% in Q1:2020 to 13% in Q2:2022, in line with the changing housing preferences due to the WFH (work-from-home) trend.
“Internal data shows the semigration trend is largely driven by the relocation path from Gauteng to neighbouring North West (Hartbeespoort) as well as coastal towns in the Western Cape (Hermanus, Mossel Bay, George, Cape Town) and KZN (mainly Ballito).”