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Homeowners Should be Bracing for Hiking Interest Rates

South Africa's interest rate hike has been a topic of much discussion among economists and consumers alike. The recent increase in interest rates by the South African Reserve Bank has sparked a wave of concern and speculation about the impact it will have on the economy and individual households.

Interest rate increase - bond originators South Africa

In this blog, we will delve into the reasons behind the hike, its effects on the South African market, and what it means for those with loans and investments. Get ready for a deep dive into the world of interest rates and their impact on South Africa.

Adrian Goslett, CEO of RE/MAX of Southern Africa, predicts that there will be another interest rate hike in the near future, though it may not be as severe as previous hikes, likely falling between 0.25% and 0.5%. According to Goslett, the South African Reserve Bank will likely continue to take measures to curb rising inflation. This could cause affordability issues for homeowners as it will become increasingly difficult to service loans.

Goslett encourages homeowners to reduce their debt levels to prepare for this possibility. Meanwhile, Barbara Larney of RE/MAX Wine and Whales points out that the real estate market is influenced by the fluctuations of interest rates. When interest rates rise, buying or selling a home becomes more challenging and affordability decreases.

However, Larney also highlights that if the economy is strong enough, the impact of rising interest rates on property values and housing prices may not be significant. In fact, economic uncertainty may create opportunities to purchase properties at reduced prices. Ultimately, the real estate market is always full of opportunities, and it's just a matter of finding them amidst the current market conditions.

Barbara Larney believes that there is no need to be fearful of buying a home as interest rates rise. In fact, the current interest rate of 9.75% is still lower than historical comparisons, even with the recent increases. The prime rate was 25% in the beginning of 1994 and decreased to 7% at the end of 2020.

However, Adrian Goslett sees a bigger concern for the future, as many economists predict that South Africa's GDP may shrink slightly in 2023, leading to higher unemployment rates and increased pressure on taxpayers. Despite the current manageable interest rates, Goslett recommends that all homeowners prepare themselves for the possibility of higher repayments on their home loan and other debts in the event of a leaner economic environment in the coming year.

For those considering buying a new home or have a home loan, Nicky Weimar, Chief Economist for Nedbank Group, answers potential questions and offers insights.

Is it a good time to buy when the interest rate is high?

For many people, the primary motivator in property investment is the desire to own their own home. This transforms a monthly expense into an investment in an asset with a value that can fluctuate. When a property is sold, the owner can expect to receive a future return, as well as have collateral for future borrowing, often at more favorable terms once equity has been established in the asset.

The cost of the investment involves considering factors such as the property's price, financing or mortgage interest rate, purchase administrative costs, and the long-term commitment to property maintenance, such as insurance, taxes, and rates. As a result, prospective property owners are impacted by changes in property value and interest rates.

In the current scenario of rising interest rates, the cost of financing increases and demand for credit decreases, leading to tighter credit standards and lower house prices. For those who have sufficient wiggle room in their monthly budget, a decline in house prices can present an opportunity to purchase a property, despite the risk of further interest rate hikes.

What are the pros and cons of buying property when the interest rate is high?

The advantages of buying property in a rising interest rate environment stem from the potential for lower property prices. However, there is also the risk of financing costs increasing in the short to medium term. The prime lending rate has already risen by 2.75% (275 basis points) from 7% in November to 9.75% in September due to inflation surpassing the central bank's target range.

Inflation is a dangerous economic issue, as it can erode purchasing power and hurt economic growth. The recent inflation spike was driven by rising fuel and food prices, but some relief has been seen with falling petrol prices. Despite this, the inflation rate is still far above the target and it is expected that the interest rate will continue to rise, potentially reaching 11%.

Prospective buyers must be able to handle the potential increase in their monthly bond repayments and take into account the slowdown in house price growth, which has slowed from 6% to 3.2% according to Lightstone's House Price Index. This will require weighing the rising financing costs against the lower property prices.

Predictions of the property market and where do that put the property investors in SA?

Investing in a property is not just about acquiring a long-term asset but also investing in the future of South Africa. Despite a rebound in property prices in other countries after the Global Financial Crisis and recession in 2009, South Africa's property market has been stagnant due to the nation's political issues and economic struggles. These challenges, such as policy uncertainty, corruption, and infrastructure shortcomings, have not been fully addressed and continue to hinder growth prospects. As interest rates rise, property prices and sales are likely to slow. Nevertheless, South Africa's property market remains fairly priced, with strong demand for affordable housing and robust growth in coastal cities. By making wise choices, prospective buyers can secure a valuable asset with a healthy return over time.

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