The South African Reserve Bank has raised its repo rate by a further 75bps, making the interest rate 6.25% which means a base home loan rate of 9.75%, but this affects more than just home buyers
WORDS: COMPILED FROM VARIOUS SOURCES BY MARK PETTIPHER :: PHOTOS: ENVATO ELEMENTS
While we saw a reduction of the interest rate increase during the pandemic, this latest increase has brought the level back to where we were as a country at the beginning of 2020. Adding to the economic pressures the rand has also declined in value against most major currencies and for those who rely on the dollar exchange, the rand has depreciated by about 3% since July. At today’s exchange rate you’re going to need R17.80 to buy the greenback and R19.93 for the British pound.
Seeff Property Group chairman Samuel Seeff says the repo rate hike was not unexpected; he is, however, calling for stability which is vital for the economy and the property market. “In terms of the impact of the hiking cycle on the property market, we are beginning to see a two-paced market emerge,” says Seeff. “While demand is still high on the one side, buyer hesitancy is increasing with deals taking much longer on the other side.
“A marginal slowdown in the market is understandable; however, 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 also believes 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 the upside is that there is now more room to negotiate more aggressively,” he says.
“Deteriorating buying conditions will probably push more people into the rental market. Given that there are stock shortages in certain areas, we could start seeing rental rates rise which will be good for the rental market which has been largely flat over the past two years.”
Says Pam Golding Property group CEO Dr Andrew Golding: “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 South African Reserve Bank has highlighted that 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.
“On the plus side, particularly for first-time home buyers, SA’s financial institutions appear to be maintaining their appetite for extending mortgages, despite requiring slightly larger deposits as a percentage of the purchase price.”
According to ooba, deposits reached a low of 5.3% of purchase price in March this year, but have risen steadily since then, reaching 9.6% in August. Lew Geffen Sotheby’s International Realty CEO Yael Geffen says property owners and consumers in general are now at breaking point. “By dragging its heels for 15 years to fix the problems at Eskom, the government is costing the economy an estimated R4bn a day, according to Business Unity SA figures. The private sector is losing ground every day and the blows just keep coming.
“The rate increase in July was the highest single rise in nearly 20 years and that put extra pressure on South Africans, who at the time were already dealing with huge increases in the basic cost of living and the previous rate hikes imposed earlier in the year.” Geffen’s advice to owners is to be realistic about their budgets. If repayments are becoming untenable, ignoring the situation in the hopes it’ll magically get better is the worst possible thing to do.
“The first step is speaking to your mortgage institution to see if a plan can be made to restructure your bond. If not, consider the option of downsizing in the medium term.” Galetti Corporate Real Estate CEO John Jack says that the increase in the repo rate will have a compounding effect on landlords, who are still dealing with high vacancy rates.
“As interest rate increase rise, so do repayments,” he says. “Commercial buildings are typically highly geared in private portfolios which doesn’t leave much room for hiking especially in the face of higher vacancies post pandemic.” September 2022 marks the third rate hike for the year, with one more expected to follow in November. “There was significant reprieve during the pandemic period with interest rates dropping to a record low, so this could be seen as a return to the mean.”
Ooba CEO Rhys Dyer agrees: “Increases such as these are to be expected following the historically low interest rates offered during the pandemic. Rates are simply returning to ‘normal levels’, but the good news is that strong competition between banks for home loans means that prospective homeowners will still benefit from attractive interest rate discounts when shopping about for a home loan. Our statistics for August 2022 show that ooba achieved an average interest rate discount of prime less 0.32% for our customers – 18 basis points lower than August 2021’s prime less 0.14%.”
Focusing on Real Estate Investment Trusts, Jack says they continue to feel the pressure post pandemic. “Reits need to maintain conservative debt levels to remain attractive to investors. A Reit’s debt levels should not exceed 40%, in contrast to a private owner where debt levels can often reach up to 70%. This, in effect, shields the Reits somewhat from interest rate hikes but it does dampen the market in terms of investment opportunities.”
During the pandemic, gearing levels shot up considerably — both because of re-evaluations and increased vacancies, requiring higher levels of borrowing and increased loan to value ratios. Looking at GrowthPoint’s recent results Jack says: “Growthpoint has shown strong signs of recovery and it remains to be seen how another interest rate hike will affect its performance.
“Reports from GrowthPoint’s financial year end highlight an increase in its dividend share by a notable 8.4% and a 2.5% increase in its annual payout ratio. In addition, group vacancies decreased by 8.5%. “Despite economic uncertainty, rising interest rates and inflation, there are signs of positive growth as many employers and employees officially return to the office.”
WHAT A BOND WILL COST YOU NOW
- R750,000 bond — extra R366, repayment increase from R6,748 to R7,114
- R900,000 bond — extra R439, repayment increase from R8,098 to R8,537
- R1m bond — extra R488, repayment increase from R8,997 to R9,485
- R1.5m bond — extra R732, repayment increase from R13,496 to R14,228
- R2m bond — extra R975, repayment increasefrom R17,995 to R18,970)
- R2.5m bond — extra R1,220, repayment increase from R22,493 to R23,713)
