24 March 202
SARB rate climbs even higher as inflation skyrockets
SARB interest rates continue to climb following the latest announcement by the Monetary Policy Committee (MPC). The repo rate jumps by 25 basis points to 4.25%, leaving the prime lending rate at 7.75%.
In his statement, SARB Governor Lesetja Kganyago noted that inflation prices pose upside risks to the short-term inflation outlook. Even as the economic impact of the pandemic fades, the outbreak of war in February between Russia and Ukraine is expected to reduce global economic growth and contribute to higher inflation. The war will likely impair production of a wide range of energy, food and other commodities and further disrupt global trade.
‘SARB is endeavouring to normalise interest rates’
“By increasing the repo rate by a moderate 25bps for the third consecutive MPC meeting, the SA Reserve Bank is endeavouring to normalise interest rates – in line with their stated strategy – amidst a resurgence in inflationary pressures and a tepid economic growth outlook. While an unchanged repo rate would have been preferred, this moderate approach has in all likelihood already been factored in by the housing market, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“With heightened uncertainty and a worsening growth and inflation outlook, but with a need to contain inflationary pressures and anchor inflation expectations, we believed the Reserve Bank was unlikely to respond to the deteriorating inflation outlook aggressively – given the risks to economic growth – and that it was anticipated to stick to the slow but steady pace of normalising interest rates evident at the past two MPC meetings.
“Attempting to tighten monetary policy to dampen price pressures but not derail the economic recovery was already challenging, but now the war in Ukraine has brought further uncertainty and financial market turmoil. The war, coupled with the West’s sanctions against Russia, has sent global commodity prices soaring, while surging food and energy prices in particular have forced local analysts to revise their inflation forecasts.
“Fortunately for South Africa, the Rand has shown unexpected resilience this year as it is underpinned by surging commodity prices, notably coal, platinum group metals and gold -commodities that SA exports, and has strengthened by 6% against the US dollar for the year to date, even as both the Fed and the Bank of England raise interest rates. This will at least partially offset the effect of soaring international oil prices.
‘Pressure on households budgets’
“Our economy is already under severe pressure, We’ve only just been upgraded from junk status by certain rating agencies, and we have a long way still to go in terms of recovery. Interest rate increases aren’t just abstract economic influences, they also have a very real impact on the daily lives of South Africans. Given the added financial pressure of rising petrol prices as well as electricity and water tariff hikes, careful financial planning is going to be key for homeowners and consumers, says Tony Clarke Managing Director of the Rawson Property Group.
“Sadly, South Africans will have to tighten their belts over the next few months. Rising fuel and food costs, as well as higher debt repayments resulting from the latest interest rate hike, will undoubtedly put pressure on household budgets,” adds Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.
“Although we had hoped for a pause by the Bank to provide some reprieve for homeowners and buyers who are facing rising costs, we believe the market is now well aware that the rate is stepping up this year to counter inflation and to normalise it after the dramatic rate cuts in 2020, says Samuel Seeff.
However, according to Goslett, it is not all bad news for the outlook of the country. “South Africa could be posed for growth if it positions itself well to fill the gaps in the global supply/demand chain. Exports already increased by 8.5% in the fourth quarter of 2021 and this stands to increase further in 2022 if the correct opportunities are seized.”
Rate hikes are pinching, but homes still more affordable
At 7.75%, the interest rate is still well below the 10% level of early 2020 before we entered the pandemic. It is generally still cheaper to buy than rent and at the end of the day, you will have a valuable asset and a secure roof over your head, says Seeff.
Seeff says it’s not expecting any dramatic impact on the housing market. “Volumes appear to have tapered from the highs of 2021, as most of the pent-up demand has now been absorbed. Nonetheless, he says the market is still trading above pre-pandemic levels and the outlook remains upbeat.”
The interest rate remains an inducement for buyers who can still find favourable bank lending conditions. Mortgage originator, ooba, notes that qualifying buyers can still find higher loan to value mortgages while first-time buyers are still able to secure 100% bonds, with costs in some instances. While there are stock shortages in certain areas, the market remains well-balanced. Seeff says while it is a good time to sell, asking prices are coming under pressure, especially in the higher price bands. FNB has also pointed to a slowing in house price appreciation to around 3.8% (from last year’s 4.1%).
The rental market has also stabilised with rental growth finally edging up marginally from the negative outlook seen in the mid-2020 to 2021 period. Seeff further welcomes the relaxation of the pandemic restrictions as a boost to open the economy further, but adds that consumers must be mindful of potential risks such as the rising prices and any possible fall-out from geopolitical risks emanating from the Russia-Ukraine War.
The market still favours first-time buyers
The latest FNB Property Barometer (March 2022) notes that emigration sales have slowed since their peak in 2019, and many buyers are instead semigrating to coastal or inland towns where they can work remotely and enjoy quality of life. The Garden Route and Ekurhuleni were identified by FNB as the top performing districts in the last quarter of 2021, based on house price growth, because of semigration trends. Coetzee adds that BetterBond’s data also points to the positive impact of semigration. “BetterBond’s bond approvals have increased by 10% year-on-year,” says Carl Coetzee, CEO of BetterBond.
Although first-time buyer activity has stabilised following the sharp uptick in 2020 when interest rates dropped to their lowest levels in more than 50 years, there are still areas reporting strong activity in this segment, says Coetzee.
Lightstone has identified the West Coast near Cape Town as a hotspot for buyers of homes between R250 000 and R1 million, which would appeal to first-time buyers, as well as upwards to R3 million. St Helena Bay and Langebaan recorded the most sales in the past year, with first-time buyers accounting for almost a third of all transactions during that period. “Similarly, our data reveals that first-time buyers can spend less than R1 million on a home in parts of the Eastern Cape, Free State and Johannesburg South East, which includes Soweto. These buyers are spending on average between R1 million and R1.4 million in other provinces.”
While the interest rate hike will mean lower spending power for most local households, Goslett hopes that it will encourage South Africans to pay off debts as quickly as possible. “The amount of personal debt (in the form of car loans, shopping accounts, and credit card facilities) that South Africans carry is high. Carrying less debt will allow more South Africans the financial flexibility to seize investment opportunities as and when they arise. They can then take on better forms of debt, such as home finance, to invest in assets that appreciate over time. My hope is that this increase might bring with it positive change in consumer behaviours and that this change may come to benefit the local housing market in the long term,” he says.
“The South African housing market also poses an appealing option for foreign investors who wish to diversify their portfolios to limit risk in an increasingly risky global economy,” he adds. For foreign investors, Goslett explains that the South African real estate market offers incredible value for money, especially within the luxury markets. “It would be beneficial to South Africans if more foreigners invest in the local real estate market as this would plough money back into the local economy and help stimulate growth in all related industries at a time when our country needs it most,” Goslett remarks.
Dr Golding agrees adding that the residential property market is holding up well, with steady activity across all price bands, despite the recent interest rate increases and economic factors mentioned above.
“According to the Pam Golding Residential Property Index, price growth has now peaked in all major regional markets, with the Western Cape recording the strongest growth rate of +6.3% in February 2022, followed by +5.4% in KwaZulu-Natal and +4.2% in Gauteng. This compares with a gradual slowdown in national house price inflation which eased from a mid-2021 peak of 5.89% to 4.5% in February 2022. It is estimated that after averaging 5.6% last year, national house prices are likely to increase by 3-4% in 2022.
Dr Golding says that during the year January to November 2021 (latest available Lightstone data), Nelson Mandela Bay remained the top performing metro housing market.
South Africans and their property market are both extraordinarily resilient. As long as future interest rate increases are done so and kept low – We’re expecting to see at least 4 different rate hikes for this year and we expect this to be done responsibly and slowly, with small increases of 25 basis points each time, so that it would not put any additional stress on the economy – and the property market should be able to absorb the hit and continue on a positive trajectory,” says Clarke.
The original article an be viewed here:
- The full MPC statement can be read here: