In January 2020, the prime lending rate was 9.75%, meaning that the owner of a R1.5 million home was paying about R14 228 per month to service that loan.
By the end of that year, and after 10 months of Covid-19 and hard lockdowns in South Africa, the interest rate had dropped to 7%, meaning that this same owner was paying R11 629 each month on his home loan.
Property owners throughout the country were rejoicing in 2020 and throughout the following 12 months as the rate remained the same until November 2021, when it increased to 7.25%.
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At this rate, that same homeowner would have been paying R11 856, only an extra R227 a month.
So the fact that the interest rate is expected to increase again this month, from its current 9.75%, is not really brand new territory for most South African property owners. It will, however, be a challenge for those who purchased a home in 2020 or 2021 when rates were dropping or stable.
And if this is one bit of positivity to help you through the coming hikes, it is worth clinging to, before you read on.
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 their 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 already 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, 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, 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 different scenarios – with increased interest rates, and consider those obligations in the context of their other financial commitments, he says. Knowing now 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 local by-laws as they may impact your decisions.”
Cobus Odendaal, 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.m to R2.4m price 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 yet.
“And, as this is the demographic which is currently bearing the brunt of the economic turmoil, it unfortunately does not bode well for this sector of the market.”
While the hikes are concerning, Carl Coetzee, 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 (SARB) is acting prudently and responding timeously to the inflationary pressures being felt worldwide.
“The European Central Bank, as an example, has raised the repo rate again – following an earlier increase of 75 basis points – in an attempt to make up for its slow response to global financial challenges and to counter high inflation.
“South Africa has been more reactive with its fiscal response, and it's important to note that the gradual normalisation of the repo rate that started in November 2021 has provided some buffer against the interest rate hikes seen elsewhere.”
Given that inflation is likely to 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 this current repo rate cycle.
“What we do know is that the objective is to bring inflation back within target range so that the SARB can start dropping the repo rate again in 2023 and 2024. Furthermore, the prime lending rate is still below long-term levels, having normalised after the record-low 7% it was in 2020.
“That being said, as we are nearing year-end when many households have additional expenses, we hope the hikes will not exceed 50 basis points at the next two meetings. Two consecutive hikes of 50 basis points each, to take the prime lending rate to 10.75%, could help curb inflation in 2023.”
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.
As advice for aspiring homeowners, he says affordability should always be a consideration, irrespective of where the country is in the rates cycle.
“The current upward trajectory is a reminder to homeowners and prospective buyers to budget wisely and consider household expenses when looking at property prices. Working with a bond originator can also provide some relief from interest rate fluctuations when buying a home.”
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