Rate hike big knock for first-time home buyers

29 January 2016 - 09:38 By Carin Smith
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Affordability is going to be key for the property market this year, said Seeff Properties chair Samuel Seeff in reaction to the SA Reserve Bank (Sarb) hiking the repo rate by 50 basis points on Thursday.

This takes it to 6.75% and the base home loan rate beyond the 10% barrier to 10.25%.

Seeff believes that although the market will absorb the rate hike, there will no doubt be a knock-on effect. The affordable and middle-income sector will feel the effect most and obtaining credit will likely become tougher for first time buyers.

"Basic living and property costs will climb considerably, as will mortgage loan costs. Buyers will be looking very closely at prices and will be driving a hard bargain as they know that the market is getting tougher," said Seeff.

"The average price growth will deteriorate further and we may even see negative equity growth when we adjust for inflation. For now though, we are still sitting with a fairly healthy housing market, packed with plenty of demand."

He added that to have a good property market, you need a good economy. Since both are heavily sentiment and confidence driven, however, he believes property will remain an attractive investment this year, although the economic decline and deteriorating confidence remain serious concerns.

Lack of supply

The rate hike is likely to create a further dampening effect on housing demand as consumers are already exercising a more conservative and considered approach to both buying and selling, according to Dr Andrew Golding, chief executive of the Pam Golding Property group (PGP).

"While doom and gloom merchants commentating on the property market abound, a more pragmatic approach presents a different picture," said Golding.
“Firstly, 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."

He added that in South Africa property is increasingly sought after among the new generation of young, first time buyers. PGP is seeing that activity in the below R1 million price range still seems to be limited mainly by a lack of supply, and not a lack of demand.

He said one must bear in mind that interest rates are still low by historical standards. At the height of the global economic crisis the prime rate in South Africa reached 15.5%.

Kay Geldenhuys, manager for property finance processing at bond originator ooba, said the rate hike will negatively impact the residential housing markets as many consumers are already facing increasing financial strain through dealing with elevated levels of debt and the rising cost of living expenses. Like Seeff, she also sees affordability as a key factor.  

The repayment on a R1 million home loan over a 20 year period will now cost the homeowner an additional R331 a month, she pointed out. On a 20 year home loan of R1 million, the monthly instalment has risen by R1,138 per month since January 2014.


Another consequence of the rate hike will be on property speculation, according to John Loos, household and property sector strategist at FNB Home Loans.

"There is little room for speculation in the housing market by speculators wishing to use cheap credit to make a quick capital gain. Rapid capital growth just isn’t there at the moment," said Loos.

He anticipates house price inflation to decline from recent levels of around 7% into lower single digit territory, below consumer price index (CPI) inflation rates, through the course of this year.

At the same time, Loos said it is best for the consumer that Sarb continues to hike interest rates slowly.

"We do believe that gradual hiking by the Sarb can assist in correcting certain macroeconomic imbalances, and is thus desirable," he explained.

"Our expectation is that the Sarb will continue to nudge rates slowly higher, possibly reaching a 11% prime rate towards end-2016/early-2017. The behaviour of the rand will be key as to whether the Sarb is allowed to hike gradually, or whether it has to “speed it up” as it has done today perhaps."

He said when buying homes, it would be sensible to buy well within one’s means in able to absorb more interest rate hikes should they materialise. It is also important to consider a higher price inflation rate and how it eats into disposable income, notably high inflation on housing related costs such as municipal rates and tariffs bills.

George Radford of international property investment firm IP Global, actually feels now is the time to invest in property.

"With a volatile start to the year for many global markets and a mixed economic outlook for 2016, the property investment industry remains stable," he said.

“Many of our clients are choosing to invest in core safe haven markets like the UK, Australia, and Germany.”

Bond restructuring

For Adrian Goslett, CEO of RE/MAX of Southern Africa, cautioned that those consumers who are over-indebted need to create a budget that allows them to live within their means. 

"If necessary, sell the second car and get rid of credit cards. Selling a home should be the last option, as property is the one long-term asset that should yield a return over time unlike cars, boats and the like," he said.  

"After a consumer has gotten rid of or ring-fenced short term debt, he or she should speak to their bank about the options of restructuring their bond."

Source: Fin24