Author: Bonnie Fourie
Multimedia Journalist, IOL Property
10 May 2022
Homeowners will more than likely have to fork out more for their bond repayments this month as the prime lending rate is expected to increase again next week.
The current prime lending rate is 7.75%.
On May 19, the Monetary Policy Committee (MPC) will meet for the third time this year, and homeowners will know whether their bond repayments will increase, decrease, or stay the same.
John Loos, FNB property economist says, however, that the prime lending rate will more than likely increase by 0.25%, taking it to 8%. FNB predicts that the rate will also increase by the same amount at each of the three meetings that will follow May’s deliberations, ultimately making the prime lending rate 8.75% by the end of this year.
Homeowners are therefore advised to evaluate their finances ahead of the announcement to make sure they can afford the potential increases, says Adrian Goslett, regional director and chief executive of RE/MAX of Southern Africa, adding that, at the previous MPC meeting, two members preferred a 0.5% rise in the repo rate while three were in favour of the 0.25% increase.
To play it safe, he recommends that homeowners check what their monthly repayments would be if interest rates were to rise by 0.5% points at the next meeting.
“There are various online calculators that can help homeowners work out the possible repayments on a home loan.”
Equipped with this information, homeowners can then examine their budgets to find the necessary funds to afford the higher repayment amounts if interest rates do indeed increase.
“Being well prepared in this regard can mean the difference between being financially secure or falling hopelessly behind on repayments,” Goslett says.
Furthermore, he warns that, unless the accompanying interest rate charges on all other debts are fixed, these repayments will also increase should interest rates climb at the next MPC meeting.
“The disposable income for those who carry other forms of debt will shrink with every interest rate hike. My advice, especially for those who are paying off a home loan, is to funnel any extra cash towards those other debt repayments ahead of the coming announcement.”
He explains that, when deciding which debts to settle first, it is advisable to go for the debt with the highest accompanying interest rate charge.
“Things such as a car loan or personal loan will often carry far higher interest rate charges than a home loan, so it might make sense to try and pay off these debts as soon as possible.
“Moving to a smaller, more affordable home might relieve the financial pressure and create a much less stressful home environment.”
Rising interest rates, lowered Covid restrictions, and increasing expenses, are but a few of the factors influencing the property market, says Richard Gray, chief executive of Harcourts SA.
“Over the past two years of the pandemic, the real estate industry experienced interesting trends, that, for the most part, had a positive impact on the market. Record interest rate lows coupled with a major rise in demand by first-time buyers translated into real estate companies reaching never-before-seen highs.”
But with normality settling in after changes to Covid restrictions, the property market will see heightened activity in regions that have been greatly impacted by the pandemic.
“We will see a heightened interest to join the industry, developments will gain momentum, and interest in diversifying portfolios will come back to light.
However, there will also be some negative effects, Gray adds.
“The interest rate will rise back to its pre-Covid range in the next two years and ever-rising fuel costs impacting an increase in all household expenses will play a major part with regard to affordability. It is hard to ignore that consumers are tightening their belts and many are in a price pinch, impacting consumer confidence.”
Although buyers might be a little more cautious, he says this does not mean they are not going to buy property.
“What we need to understand is that in an emerging market like South Africa with huge economic growth potential, real estate will always be a fantastic investment avenue.”
But it is not just their bond repayments that home owners need to consider as, like the rest of the world, Kondi Nkosi, country head for Schroders in South Africa, says inflation is being experienced with the prices of food, fuel, electricity, and many other items that make up their routine shopping are going up fast.
In South Africa, consumer price inflation is currently 5.9% year-on-year (March 2022).
“It hasn’t been this high since 2017 and has been rising steadily since a low of 2% in early 2020.
“Elsewhere, American consumers are paying 8.5% more today for everyday goods than a year ago. That’s the highest rate of price increases in more than 40 years. In the UK, the year-on-year increase in prices is at 6.2% – again the highest rate in decades.”
But what exactly is inflation?
He explains that inflation describes a change in prices. Where official consumer inflation statistics are provided on a national basis, they are usually calculated by governments.
“They work out price changes by tracking a basket of commonly-bought items. These will include food and drink, clothing, footwear, transport and energy costs, for example.”
Nkosi notes that there are also other types of inflation measures.
“Producer price inflation, for instance, tracks the prices manufacturers pay for the raw materials needed to make their goods. There are also measures for house price inflation or energy inflation.
“If the inflation rate is being reported as 5% year-on-year, it means that prices in general are 5% higher than they were this time last year.”
The most obvious danger of inflation, he says, is that if prices rise faster than incomes, people can afford to buy fewer goods and services. This can mean a fall in standards of living. In practice, inflation’s negative effects are more subtle, impacting different groups in different ways, and having a broader destabilising effect on societies.”
Recent Schroders’ research looked back in history to see how stocks in certain sectors performed during periods of stagflation – as South Africa may be facing in 2022 – when inflation is higher than average, but when economic growth is slowing. Nkosi says it concluded that the best-performing stock market sectors during periods of stagflation were utilities, consumer staples, and real estate.
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