Interest rate shock for mortgages and debt, but property to remain resilient

Interest rates have gone up by 75 basis points. What are the factors behind this and what are the implications?

While the decision to hike the repo rate by 75 basis points to 5.5% (prime rate to 9%) is somewhat of a shock (since many expected 50bps), a steeper hike was expected by the property market. Samuel Seeff, chairman of the Seeff Property Group says while it impacts the cost of mortgages and debt, it is not likely to affect the underlying demand in the market

The reality is that the weaker Rand and inflation spike to 7.4% (highest since the 2009 GFC), has accelerated rate increases. We are likely to see more aggressive hikes in September and November with the prime rate back to the pre-pandemic level of 10% by January 2023, if not sooner.

Although homeowners and buyers need to adjust to the higher costs, Seeff expects the property market to remain resilient. While slower year-on-year, we continue seeing a strong market despite the rate hikes and could end with another good year, and still ahead of the pre-pandemic volumes.

He says further that while the SARB is understandably faced with a difficult task and the rate hike may support the currency, this alone will not turn the tide. The high inflation is not because of higher consumer spending, but external factors such as fuel and food hikes which, with the rate hike, is a double-whammy for consumers who must carry the costs.

The economy must grow as a matter of urgency, he adds. Increasing the interest rate is an impediment to growth and the SARB must keep rate hikes to a minimum and avoid rate shocks which could be disastrous at a time when the economy is facing significant challenges.

Seeff says it is not the interest rate as much, but rather other factors which could have a bigger impact on the property market. These include the weak economy compounded by the lack of action on the Zondo Corruption Report, the Ramaphosa Phala-Phala scandal, electricity crisis, fuel hikes and record low business confidence levels; all of which require urgent government intervention.

Even with the hikes, Seeff notes that the interest rate remains favourable for the market. Mortgage lending remains strong with better rates, lower deposit requirements and up to 100% bonds for first homebuyers – still the best conditions for buyers since introduction of the National Credit Act in 2007.

We continue seeing a strong market. Following two successive record years, Seeff expects another record year and continues to see strong sales at the upper end with several high value R20 million-plus sales concluded, especially in the Cape.

While sellers need to be mindful of the pressure on asking prices in view of the weakened price growth, there are still opportunities to sell. The flat price growth is not just good news for buyers, but also protects the market against a bubble forming and the potential of high distress levels.

A home loan over twenty years at the prime/base rate will now cost an extra:

R750,000 bond – extra R358 (repayment incr. from R6,390 to R6,748)

R900,000 bond – extra R429 (repayment incr. from R7,669 to R8,098)

R1,000,000 bond – extra R476 (repayment incr. from R8,521 to R8,997)

R1,500,000 bond – extra R715 (repayment incr. from R12,781 to R13,496)

R2,000,000 bond – extra R954 (repayment incr. from R17,041 to R17,995)

R2,500,000 bond – extra R1,191 (repayment incr. from R21,302 to R22,493)

Writer : Gina Meintjes

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