R2,570 price pain for South African homeowners
South Africa’s interest rates rose rapidly following several inflationary shocks after the COVID-19 pandemic and have been slow to come down.
The higher interest rates cost South African homeowners with bonds at least an extra R2,570 per month.
The chairman of the Seeff Property Group, Samuel Seeff, highlighted the importance and impact of interest rates on homeowners and the property industry in South Africa.
House price growth, especially outside the Western Cape, has been dismal over the last two years. After growing at rates between 5% and 9% over the 2020-2022 period, it declined to as low as 0.5% by mid-2024.
Seeff noted that interest rates also impact people’s ability to afford their own homes and are an important measure of the health of the housing market and the economy.
Seeff explained that if the interest rate is high and incomes are not growing, it becomes more difficult to afford property, and demand lowers.
He added that this creates a situation where there is reduced competition for properties on the market, which keeps prices lower.
Conversely, Seeff said that if the interest rate comes down and incomes grow, property becomes more affordable, it becomes easier to obtain home loans, and more people can buy property.
Lower interest rates also mean increased competition for properties on the market, and buyers are inclined to offer higher prices, resulting in higher price growth.
Seeff demonstrated this by looking at house price trends since March 2020 with the onset of the Covid-19 pandemic.
In March 2020, the interest rate was at 9.75%. The Reserve Bank then introduced a series of rate cuts between March and July, bringing the prime rate down to 7%.
This immediately made properties more affordable, bringing down the monthly repayment on an R1 million home loan over 20 years to R7,753 per month.
Seeff highlighted that this spurred demand for homes, and an increase in demand resulted in a national house price growth of 4.10% for 2020.
However, several inflationary shocks forced the South African Reserve Bank (SARB) to quickly hike rates to stem inflation.
These shocks included adverse weather that affected food supplies, geopolitical tensions that hit fuel prices, and supply chain disruptions that impacted several sectors.
The subsequent incremental increases in the interest rate from late 2021 brought the prime rate to 11.25% by May 2023.
This resulted in the monthly repayment on this R1 million home loan increasing to R10,493 per month, thus an additional R2,740 per month.
Property affordability declined, and with that, the demand for property in the market. National house price growth consequently declined to just 0.7% for the 2023 period, according to the StatsSA House Price Index.
While further interest rate cuts since late last year have brought the prime rate down to 11%, the R1 million home loan repayment has only come down to R10,322—a meagre saving of R171 per month.
Comparing the current interest levels to those seen in 2020 reveals that homeowners are paying R2,569 more than they were five years ago.
Additionally, due to the hikes, Seeff noted that national house price growth remained flat at about 0.8 for 2024, according to FNB data.
While property market activity has increased, and confidence in the market has soared to the highest levels in a decade, according to an ABSA survey, data from FNB shows that house prices only increased by 1.1% in January.
Seeff said this is a clear sign that more interest rate cuts are needed. He added that the interest rate is still well above what it was in early 2020.
He argues that this is despite the fact that inflation is at around 3.2%, near the bottom of the Reserve Bank’s target range of 3% to 6%.
“A lower interest rate will provide a vital boost to the economy and housing affordability, drive higher demand, and consequently boost house price growth.”
Seeff stressed that strong house price growth is vital to encouraging further investment and development growth.
“A healthy housing market with strong growth delivers multiple economic benefits, including boosting economic and job growth and government revenue in the form of taxes,” he said.
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