The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) announcement that the repo rate is to increase by 50 basis points was not a surprise for the property industry.
At its previous meeting in March 2022, SARB Governor Lesetja Kganyago said that, given the inflation forecast, the implied policy rate path of the bank’s Quarterly Projection Model (QPM) indicates gradual normalisation through to 2024. Therefore, increases have been widely expected as part of the post-Covid interest rate normalisation trend. As a result, economists predict several more hikes this year, with the prime widely expected to reach 9.5% by December.
In his May statement, Kganjago cited various factors that affected the SA economy and influenced the committee’s decision to hike the repo rate. These included the Omicron variant, which has affected the whole world and the war in Ukraine.
“The economic costs of Covid generally continue to fall, as most economies remained open despite the rapid spread of the Omicron variant. The sustained invasion of Ukraine by Russia and China's response to the new outbreak will, however, weigh heavily on global economic growth and contribute to higher inflation,” said Kganjago.
“The war has impaired the trade and production of a wide range of food, energy and other commodities and will continue to do so for some time. As a result, the International Monetary Fund (IMF) reduced its global growth forecast for 2022 to 3.6%.”
He said the SARB revised its forecast for global growth in 2022 to 3.5% - down from 3.7% at the March meeting. For 2023 growth is lowered from 2.8% to 2.7%. For 2024, global growth will remain unchanged at 2.7%.
The governor said that dramatically higher oil, commodity and food prices, additional constraints on trade and finance, as well as rising debt costs had created worsening economic conditions for most developing and emerging economies.
Tony Clarke, Managing Director of the Rawson Property Group, says: "We were hoping for a more moderate 25 basis point hike, but the 50-point increase wasn't entirely unexpected. Between the rising international interest rates, weaker rand and massive fuel price hikes on the horizon – which will likely push inflation over the SARB's 6% upper limit – there was little else the MPC could reasonably do."
He says there is always hope for a reversal of the upward trend and expects the effect of the current increases on the property industry to be noticeable but not catastrophic.
“We expect a slight drop in demand with a corresponding increase in stock levels,” he says. "Buyers will be extremely cost-conscious and demanding and not afraid to negotiate. Sellers will need to take this into account when positioning their properties, leaning on the skills of property professionals to compete effectively.”
Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, hopes that homeowners have planned for these interest rate hikes and have already made room in their budgets to afford the slightly higher debt repayments.
“There are so many unknown variables around interest rate fluctuations that it is impossible to tell with absolute certainty whether fixing your interest rate now will be more beneficial for you in the long run,” says Goslett.
He says rising interest rates also pose challenges for real estate agents as buyers become more hesitant. However, he advises agents to remind buyers that prime was at 10% before the Covid-19 pandemic, so interest rates are still relatively low despite this year’s interest rate hikes.
Lew Geffen Sotheby’s International Realty chief executive, Yael Geffen, says the repo rate increase of 50 basis points will affect all South Africans.
"South Africans are being squeezed from all sides, and there just isn't that much room in the economy. Home repayments for a R2 million bond at prime rate will increase by more than R600 a month with this increase. The housing market is still buoyant, but buyers need to budget carefully. We expect at least one more rate hike this year, so purchases should be made with that in mind.”