Photo: Laird Forbes/Gallo Images
Rising interest rates, as well as the precarious state of South Africa’s economy, may spoil the appetites of prospective homeowners who earlier in the Covid-19 pandemic would have enjoyed a vibrant market.
With inflation in South Africa and abroad remaining at elevated levels, central banks are bound to set monetary policy on the path towards normalisation in 2022. As the repo rate is lifted the cost of borrowing goes up and homebuyers end up paying more on their mortgages.
In South Africa the repo rate has already seen lift-off after being slashed to 3.5% amid the pandemic-induced economic downturn, the latest 25 basis point increment to 4% coming on 27 January. The low interest rates seen in 2020 and 2021, aimed at supporting the economy by stimulating spending and investment, made it easier for first-time buyers to take out home loans.
In the latter part of 2020, the volume of new mortgage applications reached multi-year highs despite South Africa’s economy having shrunk 6.2% at the end of the year.
According to the November 2020 print of FNB’s residential property barometer, applications volumes were about 9% above the same period in 2019.
The conditions turned one-time renters into first-time buyers: “The aggressive reduction in interest rates (and mortgage rates), good pricing and lower transfer duties have momentarily improved mortgage affordability and incentivised renters to buy property. In part, this has contributed to rising flat vacancies and, subsequently, low rental inflation.”
But the tide has started to turn, with elevated inflation emerging as a stubborn feature of the global economy’s recovery from the Covid-19 slump, forcing central banks to react.
Recent inflation data from the US has once again bucked assumptions that soaring prices, driven by Covid-related supply chain disruptions, are transitory. Recent data from the US Bureau of Labour Statistics showed that consumer prices surged 7% in December compared with the same month the year before. Inflation in the US has topped 5% for seven consecutive months, with December marking the sharpest inflation increase in two decades.
The record US inflation data dropped a week after the minutes of the mid-December federal open market committee meeting were made public. The minutes indicated that, with inflationary pressures having broadened in the latter months of 2021, quicker monetary policy tightening and a reduction of the Fed’s balance sheet may be on the cards.
“Participants generally noted that, given their individual outlooks for the economy, the labour market and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes read.
Emerging market economies such as South Africa will have to weigh up the prospect of a more hawkish Fed as the central bank’s decisions ripple through financial markets. Most have already started to increase rates to guard against the inevitable knocks to their currencies.
Domestic consumer price inflation for December surprised on the upside, coming in at 5.9% — just shy of the South African Reserve Bank’s ceiling. The 5.9% annual increase marks the highest since March 2017, when the rate was 6.1%.
After the cuts triggered by the pandemic, the Reserve Bank effected the first rise in the repo rate last November. With inflation likely to remain in the upper band of the central bank’s target range of between 3% and 6%, it is likely the bank will continue to gradually hike rates.
The Bureau for Economic Research at Stellenbosch University is expecting inflation to be driven by fuel prices and rental costs.
Good deal: With lower interest rates, house prices and transfer duties, first-time buyers made good in late 2020 and early 2021. But rising inflation and interest rates are changing this. Photo: Jacques Stander/Gallo Images
Although mortgage demand seems to have peaked by the latter half of 2021, experts say the Reserve Bank’s decision to raise rates will probably not have a dramatic effect on the property market — yet.
The expectation is the central bank will be gradual in its approach to lifting the repo rate, FNB economist Siphamandla Mkhwanazi said. “The hikes won’t be as aggressive as the cuts were at the beginning of the pandemic. What tends to happen in the property market is that it takes a bit of time, especially if the changes in the interest rates are gradual. It will take more time before higher rates have a quantifiable impact on the property market.”
Andrew Golding, the chief executive of Pam Golding Properties, agreed. “We’ve been in a 50-year low interest rate environment. There’s no question that that was one of the significant catalysts for the markets. But, even if interest rates increase moderately over the next 18 to 24 months, we’ll still be, from a South African point of view, in a low interest rate environment.
“And so, our sense is, because it is the single-biggest lever in our market, as long as interest rates are perceived to be low, the market will continue to perceive that favourably. So, have the buyers acted in anticipation of an increasing interest rate cycle? The answer is no.”
But, Mkhwanazi noted, different segments of the market react differently. “There are those types of buyers who are more sensitive to interest rates. Those are generally your first-time buyers from low-income households. What we have seen is that those first-time buyers who wanted to buy houses already did so in the second half of 2020 and the first half of 2021. What we are seeing now is that those who are participating in the property market are mature and repeat buyers, who are less sensitive to changes to the interest rate.”
Interest rates may still factor into decisions by mature buyers, but they are less likely to be swayed, Mkhwanazi added. “They have accumulated savings. They have more access to equity, because they have already bought property. So they have that cushion.”
The bigger threat to the property market are the effects of record unemployment levels, worsened by last July’s civil unrest.
“There too, the impact has been uneven across segments. The pandemic has had a greater impact on very low income households — those that are not necessarily buying houses,” Mkhwanazi said. “There have been segments in the consumer space that have been relatively insulated and those are the guys who are actually buying now. But that is a small market. At some point it is going to run out of steam, unless we create new employment and generate new demand … So employment is our biggest concern at the moment.”
Property economist Erwin Rode also flagged unemployment and slow economic growth as a constraint to the market.
“There is no doubt that the economy is facing a tough time. Up until now some consumers have been sheltered from this. But we are approaching a time in which the consumer will be facing the full blast of the slow growth we have had, as well as the government’s precarious fiscal situation … There is no doubt that as consumers and as a nation times will get tougher and tougher. It is sort of a perfect storm that we are facing.”
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