Although the recent repo rate hike implemented by the Monetary Policy Committee (MPC) was only 25 base points (0.25%), which has brought the prime interest rate up to 9,25%, it is still a cause for concern for the South African property market, says Tony Clarke, Managing Director for the Rawson Property Group.
To put things into perspective, says Clarke, let’s take a look at what this increase in the interest rate means in real terms:
Before the rate hike a home owner, with a 20-year loan at the prime lending rate (9%), was paying R900 per month for every R100,000 on their mortgage bond. This same home owner will now be paying R916 per month.
For example, a person in this loan situation with a R1,2 million home loan was paying R10,797 and is now paying R10,990 — an increase of R193.
“This increase,” says Clarke, “seems almost insignificant, however, the real threat causing so much anxiety in the property sector is that the MPC may raise interest rates even further this year and in 2015.”
Tradingeconomics.com’s analysts, who are usually quite accurate, have forecasted that the interest rate will increase by a further 0.25% in the fourth quarter of 2014 and by a full 1% in 2015. This view is also taken by many reputable South African economists.
If this does happen, says Clarke, someone who was paying R868 per R100,000 at the beginning of 2014 would be paying R998 per R100,000 at the end of 2015 (considering they have a 20-year loan at the prime interest rate). This represents an increase of 14,9% — a figure which will stretch the finances of most South Africans.
An increase like this, he says, will not only effect home owners, but also those people renting property. In order for landlords to be able to pay their monthly instalments they will see it as necessary to increase their rentals come renewal time, which will put tenants in a financially stressed position where they are even less likely to ever become home owners.
The MPC’s decision will, says Clarke, cause argument to come from both sides. Those against rising interest rates believe that they may stunt South Africa’s economic growth rate and reduce the banks’ tendency to award bonds, while those for the rise believe that, due to the country’s increasing debt, we need to follow suit of emerging economies, such as Brazil and India, and increase rates to attract First World capital away from their own low rate markets.
Clarke’s advice to home owners in order to prepare for additional interest rate hikes is to tighten their belts now and practice living on what they would be if the rate was 1% or 2% higher, while saving the difference.
