Bad news for home owners in South Africa

South Africans are facing unprecedented financial pressure, with inflation at a 13-year high of 7.8% as of July, says Tony Clarke, MD of the Rawson Property Group. Food, fuel and transport have all reached record levels in recent months. Some basic food items have seen increases of more than 100%.

With little control over contributing factors like the ongoing electricity crisis and the war in Ukraine, the South African Reserve Bank has once again turned to the interest rate in an effort to curb runaway inflation.

The 75-basis-point interest rate increase announced today is the sixth in a row. The increase means that the repo rate will now be 6.25% per year from 23 September 2022, with the prime lending rate at 9.75%, said Clarke.

“Realistically, the SARB is caught between a rock and hard place right now,” the property expert said. “They know full well the financial pressure that consumers are under and how raising interest rates will affect them in the short term, but they also know how much worse things could get if inflation is left to spiral out of control.”

Of the panel’s five members, three voted for the 75 basis-point increase, and two preferred a 100-basis-point hike, with economists pointing to further big hikes ahead.

“Homeowners will definitely start feeling the pinch as their bond repayments continue to climb, right alongside the rest of their everyday expenses,” said Clarke. “For some, there are going to be very difficult decisions ahead. Most households have very few luxuries left to cut back.”

Lew Geffen Sotheby’s International Realty CEO Yael Geffen said 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 R4 billion a day, according to Business Unity SA figures. The private sector is losing ground every day, and the blows just keep coming.”

She said that with another hike of 75 basis points, it means the cost of servicing a bond of R2 million has increased by more than R3,700 since November last year. “People on fixed incomes are going to start losing their homes.”

Geffen said the property sector is a significant contributor to the economy, and while the government needs to hedge against inflation, it also needs to protect homeowners.

Dr Andrew Golding, chief executive of the Pam Golding Property Group, said the increase is disappointing for aspirant homeowners requiring credit and existing homeowners with mortgages, all of whom are already having to contend with the economic impact of severe load shedding, high fuel and rising food costs, and increasing electricity and other municipal tariffs.

“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.

“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,” said Golding.

According to Ooba, deposits reached a low of 5.3% of the purchase price in March this year (2022), but have risen steadily since then, reaching 9.6% in August 2022. “However,” said Dr Golding, “the pricing of those loans continues to improve, also according to ooba, with the average rate of concession at 0.32% in August”.

John Loos, property sector strategist at FNB Commercial Property Finance, pointed to a decline in business activity in the current economic environment. “We are already seeing a declining trend in commercial space building plans passed, and expect residential building planning activity to follow suit soon in part as a result of interest rate hiking.”

For landlords, higher interest rates are likely to push people toward the rental market, amid the uncertainty of when the current cycle will end. “We expect credit-dependent home buying to slow in the near term as a result of ongoing interest rate hiking, with a portion of aspirant home buyers waiting it out in the residential rental market. This is expected to lead to further decline in residential rental vacancy rates, and a mild near-term rental inflation acceleration.”

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