With interest rates likely to rise over the next few years, homeowners who haven’t looked over their bond commitments should do so, advise property experts Paul Stevens and Carl Coetzee.
The Monetary Policy Committee (MPC) decided Thursday (24 March), to increase the repo rate by 25 basis points to 4.25%, marking the third consecutive 25 basis point increase since the low of 3.5%. The decision was split among the MPC members with three members preferring the 25 basis point increase and two motivating that a 50 basis point increase would be more appropriate.
GDP growth was revised upwards from 1.7% to 2.0% for 2022 and unchanged at 1.9% in 2023 and 2024.
Interest rates are expected to rise gradually to 2024, so prospective bondholders should look at what they can afford beyond the current interest rates, said Paul Stevens, CEO of Just Property. Industry predictions suggest three or four hikes in 2022, possibly to as high as 5%, with the repo rate expected to return to its pre-pandemic (end-2019) level of 6.50% by the close of 2024.
“Home loans are awarded by default on the basis of a variable interest rate. Only once your bond has been registered can you apply for a fixed interest rate and there is a strict time limit attached before the offer lapses,” said Coetzee. “While market conditions are always a useful guide, the most important factor when deciding on whether to fix the interest rate or not should be affordability.”
Stevens said that currently, a fixed interest rate will almost certainly be higher than a variable rate so get indicative proposals from the lending institutions. “If you are applying for a bond, comparing fixed vs variable interest rate options is a worthwhile exercise. From there, you can apply the options to your appetite for risk/ uncertainty and future prospects.”
“Generally, a fixed interest rate is higher than a variable rate as it poses more of a risk to the bank. It is only negotiated at the time of bond registration and the rate offered is dependent on the going rate at that specific time,” said Coetzee.
How can buyers work out the impact on payment plans?
“A rise in the prime lending rate will have an impact on your monthly bond payments, but the increases that have been forecast by the South African Reserve Bank for the next three years are gradual and the prime lending rate should only hit double digits in 2024. This means that there is still time to make the most of the accommodative lending environment,” said Coetzee.
What is the outlook for the year?
Property data suggests that buyer activity remains strong, despite the gradual rate increase. The upward shift in rates is not unexpected, given that we have enjoyed more than a year of record-low interest rates.
“This lengthy period of low-interest rates has done well to stabilise the housing property market. While buyer activity may have started to moderate, it is still above pre-pandemic levels, said Coetzee.
“Deeds office registrations increased by a significant 11.47% for the six months ending in November 2021, up from the 8.43% growth recorded for the same period in 2020. Similarly, BetterBond’s home loan registrations for the six months ending in December last year increased by 9.85%,” he said.
Buyers’ needs have also changed and we are seeing more people semigrating to the coast or smaller towns where they can work remotely and enjoy a better quality of life. This trend is expected to bolster buyer activity over the next few months notwithstanding the gradual rise in interest rates, he added.
House price growth appears to have flattened, with FNB expecting house prices to average between 3% and 4% in 2022. The time properties are staying on the market – a good indicator of the state of the property sector – has shortened from eight weeks and six days to seven weeks and six days, well below the global average of 14 weeks and one day reported after the global financial crisis of 2019, said Just Property.
“The outcome of holding the repo rate steady for so long is that we are dealing with a very different housing market from the one that slumped into 2009 when the property boom bubble burst,” said Coetzee.
Just Property said that obtaining pre-approval if you are thinking of applying for a bond is always a good idea. It not only gives you a good idea of what you can afford, based on your household expenses, available deposit etc, but it also greatly improves your chances of bond approval when you do find your ideal home.
Tony Clarke, MD of the Rawson Property Group said that the impact of the war in Ukraine on things like global supply chains, food production and fuel prices will inevitably put upward pressure on inflation in a number of countries, including South Africa. Given that adjusting the repo rate is one of the only mechanisms the SARB has to curb inflation, he believes further increases are definitely on the cards.
“The SARB’s target range for inflation is between 3% and 6%, with the midpoint of 4.5% considered ideal,” says Clarke. “Year-on-year inflation is currently 5.7% according to the latest figures from Stats SA, which means we’re very close to the upper limit of what the SARB considers acceptable.”
While interest rate increases could contribute to keeping inflation under control, Clarke said the SARB must also keep the fragility of South Africa’s economy in mind.
“South African consumers are already under intense pressure, and costs of living are only getting worse with record-breaking fuel price hikes on the horizon,” he says. “I think the SARB is very aware of the fact that adding too much pressure too quickly could be the final straw for our embattled economy. I think we may see the prime lending rate increasing incrementally to reach around 8.5% at most by the end of the year. Any more than that is, in my opinion, unlikely.”
The good news for homeowners is that a total interest rate increase of 1% for the year is unlikely to have a dramatically negative effect on the South African property market.
“We’ve successfully weathered far higher interest rates than 8.5%,” said Clarke. “It’s definitely a good time for homeowners and prospective buyers to re-examine their budgets and cut unnecessary expenses, but we don’t expect too much negative fallout in terms of market activity and property price growth.”
One area that will receive greater emphasis is prequalification. “Financial stability is going to take centre stage, with prequalification becoming an essential tool for buyers,” said Clarke. “Getting prequalified doesn’t just help buyers improve their chances of having an offer accepted, it also provides an opportunity to prime their financial profile for preferential mortgage rates. That could go a long way towards lessening the impact of rising interest rates in the months to come.”