What does the rate hike mean for the housing market?

The Reserve Bank’s decision to increase the repo rate by 50 basis points was not unexpected. And while not good news for consumers, the rand has already benefitted from the move having strengthened against the greenback and other foreign currencies.

Yes, disposable incomes will remain under pressure. And the knock-on effect of this rate hike, and future expected hikes, is that living and property costs will climb, further impacting affordability.

But the hike is expected to curb inflation as well as protect the value of the rand. And it sends a message to investors and the international community at large – including the all-important ratings agencies – that the SARB is serious about curbing inflation and protecting the currency.

The repo rate increase of 50 bps to 6.75% is a move that will see commercial banks raise their prime rates from 9.75% to 10.25%.

“This brings the cumulative rate hiking in the current cycle to 1.75 percentage points (from a prime pate of 8.5% to 10.25%) since the start of rate hiking in January 2014, says FNB Home Loans Household and Property Sector strategist, John Loos.

“It means that, on a 20-year home loan of R1m, the monthly instalment has risen by R1 138 per month since January 2014, while the most recent 50 basis point rate hike alone adds another R331 to the monthly payment.”

But the housing market will remain “rational” Loos believes. “’Normalising” interest rates are key to healthy functioning of not only the South African, but many other countries’, residential property markets. Property “bubbles” across the world have been driven largely by cheap credit. Withdrawing this massive stimulus in an orderly way should serve to keep “irrational” behaviour in the housing market contained,” he says.

SA is still sitting with a fairly healthy housing market, packed with plenty of demand according to Seeff chairman Samuel Seeff.

“This provides some insulation against some of the economic headwinds. The market is stronger than it was in the immediate aftermath of the 2008 global credit crisis. Stock levels remain tight and we do not have to contend with the volume of distress that inhibited sales and price growth post 2007/8.”

And a healthy residential property market is probably better able than many other markets to absorb rate hikes.

“While many market commentators are suggesting that interest rates will rise by about 100-125 basis points during the course of 2016, even if these anticipated increases occur, interest rates will remain low by historical standards and, with inflation heading upward, the increase in real rates (taking inflation into account) will be more muted than the hikes in nominal interest rates suggest. One must bear in mind that at the height of the global economic crisis the prime rate in South Africa reached 15.5%,” says Dr Andrew Golding, CEO of the Pam Golding Property group.

“We do not anticipate seeing interest rates raised by several percentage points as we have in the past. In addition, in general households have reduced their debt in the wake of the 2008 crisis so will not necessarily be as sensitive to higher interest rates as they were at the time of the global financial crisis.

“Furthermore, those employed in the public sector – the largest source of employment in South Africa – continue to receive above-inflation salary increases, with areas such as Pretoria, for example, benefitting from public sector house buyers. Interestingly, other nodes such as the Cape Town metro and booming KwaZulu-Natal North Coast corridor continue to reflect high demand, with sales performance bucking national trends, adds Golding.

“Although house price growth has slowed, nominal prices are currently at record highs of approximately R1.386m (source Absa) while the real price (i.e. taking inflation into account) is just 10% off its record highs pre-crisis of August 2007.

“This follows because in South Africa we have a rapidly growing, young population for whom there is insufficient housing, so there is little reason to expect house prices to fall outright. In addition, while continuing to apply stringent lending criteria, the banks have over the past year shown a tendency to compete for mortgage business, a trend that is expected to continue.

“Looking internationally, in 2008 world GDP was negative, compared with this year’s growth forecast of 3.4%, so the global backdrop is not as dire. In 2009, South Africa’s GDP was -1.5%, but in 2016 we are looking at some +0.7% to 1% which is still positive. And while our inflation rate in Q3 in 2008 reached 13.2%, this year (2016) it is likely to be between 6-7%, in other words half that level.”

“Given the volatility being experienced in financial markets, exchange rates, stocks and commodities, many analysts are seeing property – bricks and mortar – as a sound investment and rand hedge. Property is globally recognised as a means of wealth creation and here in South Africa is increasingly sought-after among the new generation of young, first-time buyers,” says Golding.

“But,” says Seeff, “for a good property market, you need a good economy. Both are heavily sentiment- and confidence-driven. So, while property will remain an attractive investment this year, the economic decline and deteriorating confidence is a serious concern.”

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