Today, the South African Reserve Bank announced yet another interest rate hike, taking the prime lending rate to 11.75% (a level last seen mid-2009). The extended hike cycle is widely attributed to the Monetary Policy Committee’s ongoing struggle to curb inflation, which remains stubbornly outside of its target range of 3% to 6%.
“South Africans are battling rising costs on every front, from food to fuel to home finance,” says David Jacobs, Regional Sales Manager for the Rawson Property Group. “After the last rates hike, we were optimistic that we’d finally seen the peak of the current interest rate cycle.”
For some homeowners, this latest increase could see their monthly bond repayments tip over the edge of affordability.
“Established homeowners who are a fair way into their loan term will hopefully have a little more financial wiggle room, with several years of income growth behind them,” says Jacobs. “More recent buyers, on the other hand – particularly those who purchased at the peak of their affordability during Covid’s record-low interest rates – have not had the benefit of time to grow into their bond repayments.”
As a result, Jacobs says interest rate hikes are hitting these new homeowners the hardest, forcing some to reconsider the viability of their investments.
“Distressed sales are increasing, but it’s important for homeowners to realise that this isn’t their only option,” he says. “Banks are generally very willing to compromise in order to help otherwise-responsible bondholders through periods of heightened financial distress. The first step for anyone struggling with affordability is to approach their lender to discuss options.” There’s also an option to let out the property and move back with family or friends, the steady stream of rental can help with the monthly bond.
For those who need – or simply want – to sell, however, Jacobs says the market isn’t quite as unfriendly as many make out.
“As long as you price your property accurately and market it well, it’s definitely possible to achieve a favourable sale,” he says. “The key is to read the room and adjust quickly if you miss the mark. Don’t fall into the trap of letting your property stagnate on the market because you’re unwilling to compromise.”
As for buyers, Jacobs says opportunities are abundant, with plenty of well-priced properties on offer.
“One of the most valuable things today’s buyers have is time,” he says. “Supply greatly exceeds demand, which means there isn’t a lot of competition. You can safely take your time to look around, do your investigations, and find the right spot at the right price without fear of missing out.”
Jacobs does stress the importance of getting prequalified, however, to fully understand your affordability picture within the current economic climate.
“It’s also not a bad time to look at investment properties,” he adds. “The rental market has taken an upturn as buyer affordability has waned, and more people are prioritising financial predictability and lifestyle flexibility over long-term investment potential. That’s not to say rental returns are skyrocketing – tenants are also under significant financial pressure – but demand is high and outlooks are positive for solid growth down the line.”
John Loos, Property Sector Strategist at FNB Commercial Property Finance had the following comments:
This latest 50 basis point interest rate hike on its own has a limited dampening impact on the commercial property market. But it brings the cumulative interest rate hiking in the current cycle to 475 basis points since late-2021, and that amount of interest rate hiking, and this is very significant in magnitude, much of the cooling impact of earlier rate hiking still yet to impact on the commercial property market.
We believe that the full impact of all the interest rate hiking will feed into the market during the course of 2023, slowing demand for commercial property financed by mortgage borrowing. Late in 2022 and early in 2023, we had seen FNB’s Property broker surveys hinting at the start of slowing property sales activity, and we believe that there is more to come in 2023, and that this will feed into slower new commercial property mortgage lending.
This interest rate hiking comes at a particularly inconvenient time, with a slowing world economy also taking its toll on the South African economy, along with ongoing heightened load shedding exerting pressure on the economy, and property owners and tenants. Therefore, apart from the direct impact of rate hiking on slowing commercial mortgage borrowing growth, it also takes its toll on the financial strength of the commercial tenant population, which itself has other forms of debt and who’s clientele is weakened by the slower economy.
Thirdly, the direct impact of interest rate hikes on consumers’ disposable income, along with the impact of the higher inflation that caused the rate hiking, is a key negative for consumer spending and thus for retail property. The situation is likely to be similar in the Hotel Property market where aspirant holiday makers may spend more conservatively on holiday travel in these tougher financial times, and hotel revenues are still battling just to get back to pre-Covid 19 lockdown levels.
In short, cumulative interest rate hiking to date is likely to see demand for mortgage financed commercial property slow further, the commercial property market soften, and property income growth come under increased pressure, with vacancy rates possibly rise once more as tenant financial pressure increases.
Interest rate hiking to date is expected to play a key role in this market weakening in 2023, although it is not the only “headwind”, a battling world economy and high load shedding being the other negative factors.
On the residential development side of the market, new building planning has already been declining and this latest rate hike will probably reinforce that declining trend.
On the residential rental market side, earlier interest rate hiking gave some mild support to the rental market, as aspirant buyers postponed their home buying and remained in the rental market for longer. But given the increasingly severe magnitude of interest rate hiking since late-2021, we believe that the earlier recovery in the rental market may now stall, with the tenant population beginning to experience increased financial pressure in a significant weaker economic environment.
Kamikaze Granny
Lebo Gunguluza started his entrepreneurial journey with R60 and a lot of nerve. He managed to secure a bursary, which enabled him to study a BCom degree at the University of Natal. To earn money while he studied he became an agent for Edgars on campus, then went on to work in sales for the SABC. He launched his first business and made his first million by 27 but squandered it and had to work his way back to financial wealth. He launched Corporate Fusion, and at 33 his business was turning over R14 million, but he left it to others to run while he travelled the world, and he soon found himself in R4 million worth of debt. Several years later after paying off his debt, he launched GEM (Gunguluza Enterprises & Media) Group of Companies, which has become a multimillion rand business in it\’s first two-and-a-half years. He went on to become one of the \”dragons\’ on the South African edition of Dragons\’ Den, as well as one of the \”sharks\’ on M-Net\’s Shark Tank.