Pressure to hike interest rates will come, but likely not as aggressive as cuts, says economist

The overall impact of the pandemic on the property market has not been as bad as initially anticipated. (iStock)
The overall impact of the pandemic on the property market has not been as bad as initially anticipated. (iStock)
  • Once interest rates start going up again, it will likely not be as aggressive as when they were cut, says FNB Economist.
  • Inflation is expected to surprise on the downside still, FNB expects one last cut in the interest rate before it starts being hiked again.
  • Then rates are expected to remain relatively flat until 2022.

There will be pressure to hike interest rates, but these will likely not be as aggressive as the cuts were, in the view of FNB Economist Siphamandla Mkhwanazi.

"We think there will be one last cut in interest rates as inflation will surprise on the downside. The balance of probabilities is still tilted towards a last rate cut and interest rates then remaining relatively flat up to 2022," he said at a residential property webinar hosted by Rode & Associates and Real Estate Investor on Tuesday.

He explained that the overall impact of the pandemic on the property market has not been as bad as initially anticipated, mainly due to the "aggressively low" interest rates, which encouraged renters to buy, and due those working in professions so far having been relatively unaffected by job losses.

Therefore, in his view, there is not really a "brand new" demand at play in the property sector currently. For a "brand new demand" there would have to be massive employment creation and a massive inflow of skilled migrants into the country who would then be looking for property.

"We are not seeing any of that at the moment, so the only trend really is a switch from renting to owning," he said. This trend is also responsible for what he calls the subdued inflation in the rental market. This does, however, create questions about sustainability of the situation changes once interest rates do go up again.

READ: Real house prices in SA set to decline for next 5 years, says property economist

Lifestyle changes

Another trend he mentioned is people re-examining their lifestyle needs due to lockdown. There is, for example, an increase in demand for apartments at ground level so there can be space for gardening.

"Households are assessing what their homes should offer if it is to double up as a working space as well," he said.

There has also been demand created from people moving from major metropolitan areas to smaller cities like George where they can still find value.

According to property economist Erwin Rode, pointed out that the main success of lifestyle developments like Val de Vie near Paarl in the Western Cape, usually lies in them being situated not more than about 40km from a metropolitan area.

"If you really want to move far away from a metropolitan area this can be done these days due to having internet access, but then it would not be an investment decision, but rather a lifestyle decision to go and live in a rural area. One has to distinguish between these two," said Rode.

James Wilson, CEO of property development group Amdec, agrees that the pandemic has perhaps caused people to think more about lifestyle choices. Traditionally, lifestyle estates have done very well in SA.


As for lenders, Mkhwanazi says they are taking a cautious approach in approving mortgages, yet the volume of approvals is still 1.5% above the 2019 level over same period. In his view, intense competition in the banking industry, especially an appetite to claw back some lost market share, favours buyers. That, together with lower mortgage rates have kept the market going during the pandemic, in his view.

"Improved affordability has offered sellers more room to negotiate. Market discounts remain relatively elevated, but not as bad as initially forecast. The market is still relatively over supplied. In the higher end of the market we have seen immigration sales increased strongly in 2019," said Mkhwanazi.

"In 2020 we see the higher end sellers are preferring to take their properties off the market due to market conditions and realising they will not get the price they want. So, they rather do home improvements instead."

Overall, the lower end of the market activity has started to pick up in line with the lifting of lockdown restrictions. Over 60% of those selling due to financial pressure still buy again but just a cheaper property. That makes property price growth much better in the lower end of the market.

"Our view is that, while we have been positively surprised by the kind of activity we are seeing now, due to labour market conditions we could see more pressure in the medium term as pressure starts to extend to white collar workers as well. This could likely lead to more pressure on price growth," concluded Mkhwanazi.

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