Interest rate hike will negatively impact the residential housing markets

Posted On Thursday, 28 January 2016 20:18 Published by
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Ooba says the decision today by the South African Reserve Bank to increase interest rates by 0.5% from 6.25% to 6.75% will negatively impact the residential housing markets as many consumers are already facing increasing financial strain through dealing with elevated levels of debt and the rising cost of living expenses.


“Housing affordability will become more constrained for prospective homebuyers as a result of this latest rate increase,” says Kay Geldenhuys, ooba manager for property finance processing.   

“Prospects of further interest rate increases this year, together with sluggish economic growth and inflationary pressures will result in a slowdown in the demand for residential property. The repayment on a R1m home loan over a 20 year period will now cost the homeowner an additional R331 a month,” concludes Geldenhuys.  

Market sentiment is a key factor which impacts on activity in the residential marketplace, so today’s decision by the Monetary Policy Committee to further increase the repo rate - by 50bps - is likely to create a further dampening effect on housing demand as consumers are already exercising a more conservative and considered approach to both buying and selling, says Dr Andrew Golding, CE of the Pam Golding Property group.

“This increased caution is not surprising as disposable incomes remain under pressure, against a backdrop of rising inflation, further eroded by above-inflation increases in municipal rates and utility tariffs and as economic growth remains stunted.

“The decision to hike the repo rate at this first meeting of the year was widely forecast as the recent rand weakness and concerns about the deterioration in inflation expectations exerted pressure on the MPC to reinforce perceptions that it would take the necessary steps to contain inflation even though the economy is weak.”

Dr Golding says while doom and gloom merchants commentating on the property market abound, a more pragmatic approach presents a different picture.

“Firstly, given the volatility being experienced in financial markets, exchange rates, stocks and commodities, many analysts are seeing property – bricks and mortar - as a sound investment and rand hedge. Property is globally recognised as a means of wealth creation and here in South Africa is increasingly sought after among the new generation of young, first time buyers. 

“While many market commentators are suggesting that interest rates will rise by about 100-125bps during the course of this year (2016), even if these anticipated increases occur, interest rates will remain low by historical standards and, with inflation heading upward, the increase in real rates (taking inflation into account) will be more muted than the hikes in nominal interest rates suggest. One must bear in mind that at the height of the global economic crisis the prime rate in South Africa reached 15.5%.

“Looking internationally, in 2008 world GDP was negative, compared with this year’s growth forecast of 3.4 percent, so the global backdrop is not as dire. In 2009, South Africa’s GDP was -1.5 percent, but in 2016 we are looking at some +0.7% to 1% which is still positive. And while our inflation rate in Q3 in 2008 reached 13.2 percent, this year (2016) it is likely to be between 6-7%, in other words half that level,” concludes Golding.  

According to John Smyth, CEO of Multi NET: “With South Africa’s currency now showing an unprecedented weakness and the cost of living rising and with inflation set on an upward trajectory and likely to continue in this way and with so many South African families still apparently unable to keep their spending within a reasonable budget, we can, I believe, predict that by the end of this year not only will the rate have risen by a full 1% or more, but also that the banks are likely to tighten up on their loan criteria."

The government, in theory, remains committed to the principle of home ownership, but the sad truth is that over 70% of our people will not in the foreseeable future be able to afford their own homes without some form of government assistance. 

For those who do own properties which they can rent out, the big consolation of the current situation,” said Smyth, “is that under the circumstances their returns will continue to rise and the value of their properties will continue to increase.”

Jawitz Properties’ CEO Herschel Jawitz says that the latest rate increase by the Reserve Bank will not improve the confidence of an already fragile consumer. While the residential market has continued to outperform a slow economy,  weak consumer confidence driven by stock shortages and good demand, there has been a slowing in the rate of growth of house prices in 2015.  It is likely that house prices, in real terms off the back of the latest rate increase, may well decline in 2016. 


The 50 basis point means an increase in repayments of R165 per month per R500 000 of bond.  “This may not appear to be particularly significant at first glance, but when added to the previous rate hike it begins to add up. Even though demand may be slow, the market will remain well balanced between sellers and buyers presenting opportunities for both parties to achieve fair deals,” Jawitz says.

Last modified on Friday, 29 January 2016 07:24

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