The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) increased the key monetary policy interest rate – the repurchase, or repo rate – by 25 basis points from 6,50% to 6,75% per annum at the November 2018 MPC meeting. As a result, banks announced that its prime lending and variable mortgage interest rates will increase from 10,00% to 10,25% per annum, effective from 23 November 2018.
Financial institutions’ deposit rates will also increase against the background of the rate hike, which will result in a rise in interest earned on savings and investment products.
According to Jacques du Toit, Property Analyst at Absa bank says, “Future interest rate movements will remain largely dependent on trends in relevant key economic and financial market data, with the SARB forecasting a further four repo rate hikes of 25 basis points each to a level of 7,5% per annum by end-2020, which will cause other lending rates such as prime and mortgage rates to rise as well. Further hikes in lending rates will put increased financial pressure on the business sector and consumers, which will result in continued subdued conditions across the residential property market.”
Comments from the property industry
While most financial analysts predicted that we would end the year at a repo rate of 6.75%, the timing of this hike is unfortunate. Just ahead of the Christmas season which sees an uptake in consumer spending, South Africans will now have to find room in their budget for higher instalments on their home loan and other debts.
“It is disappointing, but not unexpected that the MPC has chosen to increase rates at this meeting. The challenge now falls onto consumers who are already pinched by rising fuel costs, a weakening economy, and a month of increased expenses to keep up with the payments on their home loans and not fall behind on any other credit repayments,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
“As difficult as it may be, consumers will need to practice careful financial discipline to make sure they get through this Christmas season without leaving a dark mark on their credit record. Falling into arrears on your home loan is a dangerous slide towards financial ruin. If you are really struggling to keep up with your payments, perhaps consider renting out a room in your home if you have the extra space. Alternatively, you should consider downscaling, but this should be done before you reach a dire point in your finances which would lead you to accept low-ball offers out of desperation,” Goslett adds.
For home-owners with bonds, the interest rate increases announced by the Reserve Bank today will add at least R16,60 per R100 000 borrowed to their monthly repayment, according to BetterBond, SA’s biggest bond originator.
“So on a 20-year loan of R1m, for example, the monthly instalment will rise by at least R166 and possibly more, depending on the current interest rate that the borrower is paying,” says BetterBond CEO Rudi Botha.
“And the interest rate decision, which will see the repo rate rise to 6,75% and the prime rate rise to 10,25%, will also mean higher monthly repayments on every other form of debt, including car finance, credit cards, store accounts and personal loans.”
“Many households are already under great financial pressure due to the petrol price increases this year and the increase in VAT, which have a knock-on effect on the prices of almost all other goods and services. So to now have to pay more on every debt instalment as well is going to be very difficult.”
What is more, Botha notes, the January increases in everything from school fees to medical aid subscriptions are not far off, “so we are really urging consumers not to overspend or run up any more debt in the next few weeks – even if it means ‘missing out’ on some enticing Black Friday deals and seasonal special offers.
“In addition, we strongly suggest that if you do get a bonus this December, you use it to reduce whatever debt you have. If you are a home-owner, for example, the best thing you can do with it is to put it straight into your bond account and reduce the capital portion of your home loan. You will really thank yourself next year when your monthly instalments are lower – especially if interest rates continue to rise, as many experts are now predicting they will.”
Meanwhile, he says, today’s rate increases will also make it more difficult for first-time home buyers to save up deposits and to qualify for bonds. “They will most likely either have to postpone their purchase or opt for a cheaper home, but either way, they should consult a reputable originator like BetterBond to obtain proper pre-qualification for a home loan before they start looking for a property, so that they know what they can realistically afford.
Herschel Jawitz says that the decision to increase rates by 25 basis points was not unexpected given that the latest Consumer Price Index (CPI) measure stands at 5.1%, which is in line with expectations. The Reserve Bank has been trying to balance its inflation mandate with a subdued economy but consistency of policy is also key in terms of keeping inflation in check.
The biggest challenge is that virtually all the pressure on inflation is supply driven, such as the weak exchange rate and increased cost of fuel. There is zero demand pressure on inflation. This extends to rental inflation which is part of the basket of goods and services used to determine the CPI numbers. According to the latest FNB Property Insights report, the actual increase in year-on-year rentals is just over 4% but the escalation in rates and non-electricity utilities sits at a much higher figure of 11% – once again, a supply-side issue.
The increase in rates will continue to contribute to a subdued residential market from a demand point of view. With inflation at 5.1%, property prices will continue to decline in real terms after inflation across most parts of the country which means that the current residential market offers the best value to buyers since the market crash in 2009 – for those buyers who wish to get into the market.
Pam Golding Properties
While many market commentators would probably have liked to be a fly on the wall during the Monetary Policy Committee’s earnest deliberations this week, the final outcome is what matters, and for homeowners with mortgages and credit debt, as well as aspirant home buyers, the news of a 25bps increase was not what they wanted to hear.
With October’s inflation of 5.1% in line with expectations – slightly higher than September’s 4.9% yet still within the 3-6% target range, and with some relief in the fuel price expected in December as a result of the oil-price slump, coupled with a stronger rand and against the backdrop of a tepid economy, it would have made sense to hold the repo rate stable, at least for now.
Indeed, the current recovery in the Rand, coupled with the recent slump in the oil price, suggest that the local inflation outlook has improved somewhat, potentially easing pressure on the MPC to begin hiking interest rates in the near-term.
A pause in the repo rate cycle would have helped stimulate economic confidence and provided some relief to consumers – particularly at a time of year when many are looking ahead to the holidays and planning for the year ahead as well as any home relocations due to a change in career or lifestyle.
Clearly however, there are still inflation risks which may incline the MPC towards continuing on a modest hiking cycle in the New Year, particularly as the rand remains vulnerable to shifting investor sentiment and monetary policy tightening in the developed world. It would thus be wise for home buyers – particularly first-time purchasers –to factor this in along with the other costs associated with acquiring residential property.
On a positive note, we continue to see pockets of robust and also renewed activity in the housing market. Pam Golding Properties is seeing an uptick in sales in areas of Cape Town such as the Atlantic Seaboard, Southern Suburbs, Blouberg and Durbanville which have picked up considerable steam; Gauteng’s Hyde Park, Fourways and Pretoria; and in KwaZulu-Natal the region north of Durban, while areas of the Eastern Cape such as East London and Port Elizabeth are also more than holding their own.
A notable trend in regard to sales in areas offering accessibly priced homes is a consistent demand and even in some instances, weighting towards buyers up to approximately 35 years of age, indicative of increased buying power and growth in the younger population of upwardly mobile consumers putting down roots for the future.
With electricity price hikes looming, existing and potential home owners alike are likely to focus even more attention on energy-saving features to reduce municipal tariffs, as well as contingency plans for water shortages.
The case for home ownership and investment remains as compelling as ever, particularly in the current buyers’ market, as people need a place to call home, whether as an investment or primary residence.
Home owners and buyers will need to continue tightening their belts as the interest rate climbs and the economic and property market recovery takes longer than hoped, says Stuart Manning, CEO for the Seeff Property Group.
Nonetheless, even with this hike, the interest rate is still at some of the best levels in years and the Seeff Group does not expect much of an impact on the property market. The bigger impact is coming from the socio-economic environment and only once some these are resolved are we likely to see the next upward phase, he says.
While we are looking forward to a much improved 2019, the reality is that with the General Election scheduled for May, it is likely that any uptick will only really be seen from around mid-2019. We are therefore likely to kick off 2019 on much the same foot as we are now and will need to be patient for a while longer.
Once the May General Election is out of the way and if we get a positive result that reinforces a mandate to President Ramaphosa to continue his reforms, we will see this translate into more positive sentiment, so critical for the economy and property market.
The president has demonstrated his commitment to rooting out corruption and maladministration and returning to good governance. Recent successes with his investment drive adds further to the positive outlook.
In the meantime, we welcome the busy summer tourist months, a time when there is generally more positive sentiment in the property market. Conditions remain favourable for buyers who are able to find good value given the flat price growth and rising stock levels, but don’t wait too long.
All economies and property markets go through cycles of ups and downs and many will tell you if only they had bought at a particular time. While price growth has flattened, there has been no price devaluation yet and it is still safe to invest in property, he concludes.