Effect Of 0,5% Interest Rate Hike On Homeowners, Sellers And Buyers In SA Property Market

The South African Reserve Bank has raised interest rates on 30 March 2023 for the ninth time in a row since it began tightening policy in November 2021 when the repo rate was at 3,5%, adding a total of 425 bps to the repo rate and pushing it up to 7,75% in a bid to tame the inflation, effectively raising the prime interest rate to 11,25.

The repo rate has now surpassed its pre-pandemic (end-2019) level of 6.50%. The prime rate is now at similar levels to January 2005 and January 2009 (about 11%) - which was before and just after the housing bubble.

Owing to the rate hike, the monthly bond repayments over a 20-year term on a R1 million bond will increase by an extra R341, from R10 152 to R10 493.

What does this mean for the property market?

• HOMEOWNERS

For homeowners who bought during the COVID19 historical interest rate low period, times are now tough - if you bought a home by securing a R1.6m loan, your monthly repayment which was R12,500 has now gone up to R16,650 per month - a 33% increase. For these homeowners it is time to tighten the belts and do everything they can to see this period through.

If you were paying off a R2 million home loan as of the end of March 2023, your interest repayment would have increased by R680 during April 2023 due to the 0,5% interest rate increase, and since the interest rates increased cycle began, by just over R5500 more, so it is not good news if you are servicing debt. If you have got any money now which you can use to pay down your debt, now would be a good time to do that.

The increase in interest rate is not limited to home loans, but other interest-linked products such as credit cards, overdraft facilities, personal loans, and revolving loans which leads to a reduction in disposable income, which in turn leads to financial strain on middle- to low-income households.

• SELLERS

For property owners looking to sell, the latest interest rate increase will put more pressure on sales prices as 88% of property buyers use a home loan to finance their purchase (with an average of a 10% deposit and a home loan of 90% of purchase value). Higher interest rates relay to smaller home loans - as the buyers' affordability are curtailed.

The SA Reserve Bank lowered our prime interest rates to 7% during COVID19 (between July 2020 and November 2021) - a historical interest rate low when you could secure a loan for R1 million based on a monthly repayment of R7 753. With prime interest rate now at 11,25%, for the same R7 753 per month the buyer will now only be able to secure a loan for R738 900. That's a 26% reduction in home loan value - which means sellers have lost a fairly big portion of the potential buyers due to a drop of what buyers can afford.

Much less buyers mean much more competition amongst sellers which normally equates to a price adjustment downwards.

• BUYERS

For potential buyers in the market who have sufficient cash and disposable income, the market is filled with opportunities to invest in high quality assets below fair market value, and the smart investor is using this cyclical downturn to set themselves up to profit in the next upturn.

For potential buyers (and especially first-time homebuyers) who look to fund their purchase through a home loan, the calculation has now tipped in favour of renting instead of buying. Where previously with low interest rates one could buy for the same amount as one could rent, the cost of buying (with a home loan) is now exceeding the cost of renting. This has during the last few months led to a big decrease in the number of buyers in the market and a reduction on average of about 10% to 20% in property sales (depending on the area).

Buyers searching for a property at present, need to budget for the following increases per month:

R500 000 bond - additional R170 p.m. from R5 076 to a R5 246 monthly home loan instalment

R750 000 bond - additional R255 from R7 614 to a R7 869

R900 000 bond - additional R306 from R9 137 to R9 443

R1 000 000 bond - additional R341 from R10 152 to R10 493

R1 500 000 bond - additional R511 from R15 228 to R15 739

R2 000 000 bond - additional R339 from R20 305 to R20 985

R2 500 000 bond - additional R424 from R25 381 to R26 231

WHAT TO DO?

Sellers need to get to know and understand the market they are competing in - to be able to get highest possible price for their property given the buyer market conditions. Pricing is of the utmost importance, and for that, you need the help of a very experience estate agent who has already not only survived in a previous buyers' market but has thrived in it.

Landlords also need to set the right monthly rental for their property - despite the big shortage in rental properties we are experiencing at present. Getting a credit verified tenant in good standing with an unblemished rental history (never been blacklisted) and using the marketing and management services of a rental agent who employs the safest and latest rental tools to manage the property on your behalf, is non-negotiable.

Buyers need to be crystal clear about their home loan affordability by getting themselves pre-qualified via a reputable bond broker (home loan specialist) . Although most economist do not see any or minimal further interest rate hikes for the rest of 2023, the safest way to buy a property right now is to budget for another 0,5% interest rate increase. Downscaling in terms of the property price bracket they would like to buy within, might also be prudent.