Be prepared for interest rates to rise again
ECONOMISTS and property experts believe the interest rate will be hiked again this month, putting homeowners and buyers under increasing financial pressure.
FNB anticipates a 0.5% hike by the South African Reserve Bank (SARB) at the November meeting, which will bring the repo rate to 6.75% and the prime lending rate to 10.25%, says the bank’s senior economist Koketso Mano.
However, he says it is important to note a potential upside to this view, given that the Federal Reserve Bank is expected to implement its fourth consecutive 0.75% hike today. The broader consensus for the SARB hike in November (0.75%) is more in line with what the Fed is expected to do.
“With the continued tightening of lending standards, affordability will be further eroded and the momentum in household credit growth should slow in the coming months.
“For now, credit remains available and uptake has been robust.”
However, FNB’S Q3 2022 Estate Agent survey indicated that buying activity has started to slow and there are strong indications that lower-income households are feeling the pinch of the prevailing cost of living pressures, Mano says.
“Unlike many major economies, South Africa went into the pandemic with a fragile labour market, which limited the upswing in house prices. This implies that affordability in South Africa, as borrowing costs rise, is likely better than in countries that experienced overheated housing markets post pandemic. As such, we expect the slowdown in buying activity to continue, but this
will likely not translate into house price depreciation.”
Adrian Goslett, the regional director and chief executive of Re/max of Southern Africa, also predicts that there will be another interest rate hike at the end of the month, although not as severe as previous hikes.
He believes the increase will be 0.25% or 0.5% “because the SARB will most likely still be trying to curb rising inflation”.
If this is the case, affordability will then become a concern for the homeowner.
“It will become more difficult to service loans as interest rates climb, which is why we’ve been encouraging homeowners for a while now to reduce their debt levels to be able to accommodate for this.”
Although not able to predict the exact hike, Paul Stevens, the chief executive of Just Property agrees that the interest rate will increase this month, and advises those with mortgage bonds to look beyond this to market predictions of a 6.50% repo rate by the end of 2024. This will put the interest rate at 10%.
“It is better to plan well ahead than to wait until interest rate hikes become unmanageable and to try to solve the problem when it’s too late.”
Mortgage holders should calculate what their repayments will be in various scenarios – with increased interest rates – and consider the obligations in the context of their other financial commitments, he says. Knowing if there is a potential breaking point in affordability allows one to take action proactively.
“There is plenty of commentary in the media regarding interest rate increases and I would like to encourage mortgage holders to pay attention to how these impact them immediately and over the next two years at least.
“There are plenty of options to consider if affordability is a potential issue, and talking about your concerns with your mortgage lender is advisable. They don’t want bad debt any more than you do, so work with them to protect your property and their loan.”
Stevens also urges homeowners to consider ways to use their property to raise extra income, for example, letting a portion of it – a granny flat, a spare room, a garage or even a parking bay.
“Inter-generational living and other forms of co-habitation can allow you to share costs. Just be sure to check by-laws as they may impact your decisions.”
Cobus Odendaal, the chief executive of Lew Geffen Sotheby’s International Realty in Johannesburg and Randburg, says the rate increase could be by as much as 0.75%, but thinks it is more likely to be 0.5% as “the reserve bank is trying to be ‘softer’ on the consumer in their efforts to curb inflation”.
“And, as Reserve Bank governor Lesetja Kganyago recently said, they believe that not curbing inflation will be more harmful than hiking the interest rate in the long term, so I think we can expect an increase.”
He too believes that the hike could be tough for the market to cope with.
“With the goal being for inflation to be stabilised by Q4 in 2024 at 4.5%, I think we are in for the long haul which is a bit concerning, especially as higher interest rates mostly impact the sector that has been most active and has been underpinning the market – property in the R1 million to R2.4m band.
“On a 0.5% hike, it adds around R400 extra per month on a R1m bond which makes a big difference to the disposable income of these owners/buyers.”
In the middle market of around R3m to R6m, Odendaal says the main issue will be investor confidence as many are beginning to wonder when, and where, the constant increases will end – and few people think we’ve reached the turning point.
“And this is the demographic that is bearing the brunt of the economic turmoil.”
While the hikes are concerning, Carl Coetzee, the chief executive of Betterbond, says it is important to keep an eye on the global picture and recognise that recent repo rate increases are in fact a sign that the South African Reserve Bank is acting prudently and responding timeously to the inflationary pressures being felt worldwide.
Given that inflation will probably remain high for the next few months, he says South Africans can expect at least two more repo rate hikes before it stabilises in March 2023. However, it is too soon to say whether we should expect increases of 0.5% or more as we near the peak of the repo rate cycle.
As many homeowners will be paying more on their bonds, Odendaal expects to see lower transaction volumes and a softening of house prices.
However, this will be segmented across the market, with the lower end relying heavily on housing finance.