Mounting pressure on homeowners as interest rates continue to climb

The further increase of 75bps in the repo rate announced by the Monetary Policy Committee is disappointing for aspirant homeowners requiring credit and existing homeowners with mortgages, all of whom are already having to contend with the economic impact of severe load shedding, high fuel and rising food costs, and increasing electricity, and other municipal tariffs.

This, according to Dr. Andrew Golding, chief executive of the Pam Golding Property group, who says, although this is the sixth consecutive hike in the repo rate (taking it to 6.25%), as the Reserve Bank attempts to bolster the weakening rand and dampen inflation expectations, this still remains below pre-Covid repo rate levels of 6.5%, while the prime interest rate now stands at 9.75%.

'Strain on household income'

“Consumers, in general, are feeling the strain on household income, with the food and energy price shocks earlier this year creating an inflationary ripple effect across the economy.  That said, the Reserve Bank has highlighted the fact that the key challenges facing the local economy are not the current level of interest rates and the cost of borrowing, but rather the ongoing infrastructure bottlenecks such as electricity and transport, as well as education,” says Dr. Golding.

“The Reserve Bank’s deputy governor, Dr. Rashad Cassin, recently suggested that the bank is attempting to move towards a more ‘neutral’ interest rate setting and would be attempting to avoid dampening economic activity as much as possible.

“The MPCs decision today was ultimately guided by the inflation outlook and its assessment of the risks of wage inflation emerging, coupled with global trends of significant interest rate hikes. While higher local interest rates will help to protect the rand, when combined with rising price pressures they will temper domestic spending at a time when the economy is already struggling to grow, particularly given the recent return of Stage 6 load shedding.

“Despite the rising trend in interest rates since late-2021, activity in the housing market has remained remarkably resilient thus far – with recent data from Lightstone showing that while unit sales during the first half of 2022 were marginally below those recorded during the same period last year, the value of those sales was higher. Looking at the regions, the semigration trend saw the Western Cape record a higher number of sales during the first half of this year compared to the previous four years," says Dr. Golding. 

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‘Hike largely expected’

Samuel Seeff, chairman of the Seeff Property Group, says the increase now effectively takes the interest rate back to the pre-pandemic level.

“While the hike was largely expected, stability is now vital for the economy and market. We would have liked to have seen only a 50bps hike, but the 75bps hike is not a surprise, a 100bps hike would have been overkill and too high under the present conditions. The Bank now also needs to signal when the hiking cycle will come to an end and when we can expect rates to start coming down again, he adds.

Although the oil price is more favourable and a positive for the economy, inflation remains above the Reserve Bank’s target range despite slowing slightly to 7.6% in August (from 7.8% in July). It is also understandable that the Bank would look to protect the currency in view of the further deterioration against the Dollar this week.

‘Stability must return’

Despite the balancing act that the Bank needs to do, Seeff says stability must return to the economy and property market. The economy needs a kickstart and a favourable interest rate is vital for this. Interest rates need to be kept as low as possible for as long as possible.

In terms of the impact of the hiking cycle on the property market, Seeff says we are beginning to see a two-paced market emerge. While demand is still high on the one side, buyer hesitancy is increasing with deals taking much longer on the other side.

Aside from the spiking interest rate, he says the deteriorating conditions in the country are not helpful. The power outages combined, poor economic data, and macro events including the Ukraine crisis could be compounding buyer hesitancy.

What this means is that after a buoyant first few months and an expected slowdown over winter, we have not seen much of the expected jump in September which usually sets in as the summer approaches. Seeff adds that we would need to monitor this over the next few months to assess whether a downward trend is now evident.

While a marginal slow-down in the market is understandable, he says it remains relatively well balanced, and is still performing above the pre-pandemic level. It is still a good time to sell, and provided you are in the right area and price range, you should be able to attract a buyer and a good price. If it is a good offer and fits in your price range, you should not wait for a better price.

Seeff says the price boom is now largely over. Price growth continues its steady decline and sellers are cautioned against holding back for higher prices. Buyers must now adjust to the higher interest rate, but he says the upside is that there is now more room to negotiate more aggressively.

The deteriorating buying conditions will likely push more people into the rental market. Given that there are stock shortages in certain areas, he says further that we could start seeing rental rates rise which will be good for the rental market which has been largely flat over the last two years. 

'Interest rates climb as expected' 

Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says the impact of these interest rate hikes might only be felt next year, especially if interest rates continue to climb in the next few announcements.

“Property market activity is still unusually high even after the last interest rate hike; so much so that many parts of the country are experiencing a seller’s market where demand far outweighs supply. This is possible because interest rates are still lower than pre-pandemic levels of around 10%. The effects of these interest rate hikes might only be felt after homeowners have had a few months of paying the higher debt instalments,” he notes.

Following this announcement, Goslett encourages real estate professionals to check that their potential buyers are aware of how the new interest rates will affect the repayments on the home loan they are hoping to qualify for. “Buyers might be able to afford less than they realise after factoring in the new repayment amount, so it would be good for real estate professionals to confirm this with their buyers beforehand,” he recommends.

As a final word of advice, Goslett cautions homeowners to keep on top of their expenses to make sure they do not fall behind on the higher debt repayments in the coming months.

‘Between a rock and a hard place’

“Realistically, the SARB is caught between a rock and hard place right now. They know full well the financial pressure that consumers are under, and how raising interest rates will affect them in the short term, but they also know how much worse things could get if inflation is left to spiral out of control,” says Tony Clarke - Managing Director of the Rawson Property Group.

“Raising interest rates is a tried and tested method of controlling outsized inflation. However, it often makes life harder before circumstances improve. Homeowners will definitely start feeling the pinch as their bond repayments continue to climb, right alongside the rest of their everyday expenses. For some, there are going to be difficult decisions ahead. Most households have very few luxuries left to cut back and this rapid climb will doubtless push some homeowners past the point of no return if their finances are not in order."

Advice for homeowners and buyers

“Current conditions could provide excellent opportunities for buyers with a long-term view on growth potential. It’s definitely not the time to overextend, and I do recommend doing a thorough budget analysis before any purchase and it would be wise for buyers to get prequalified. Getting pre-qualified is a very important step for a buyer when navigating the current market as it will help with figuring out your affordability. That said, there are going to be some great bargains on offer, particularly for those able to mitigate the effects of more expensive lending through sizeable deposits or cash purchases,” says Clarke.

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