Further Interest Rate Hikes Threaten South Africa’s Real Estate Market

    Interest rate hikes show no signs of slowing down, and Seeff takes a look at the impact on the local real estate market

    The latest 0.75% interest rate increase by the Reserve Bank could be a sign of bigger hikes to come. Samuel Seeff, chairman of the Seeff Property Group, reports that this is particularly concerning for the real estate market.

    The Impact of Interest Rate Hikes

    Consumers are feeling the pinch from the higher-than-expected interest rate hike, which they must now absorb on top of food, fuel, and living costs. Unsurprisingly, this has a domino effect on many industries, real estate included. This is concerning since an active real estate market is vital to the economy’s health. 

    • Interest rate hikes will not only hurt property transaction volumes (i.e. the number of properties sold within a specific time period), but impact property taxes such as transfer duties, rates and taxes, VAT, and CGT, as well as personal income tax contributions. 
    • Interest rate hikes affect South Africa’s unemployment rate, too. Professor François Viruly from the Urban Real Estate Research Unit at the University of Cape Town conducted a study that revealed that residential real estate creates over three direct and indirect employment opportunities for every R1 million of output generated.

    Consider that during the first quarter of 2022, South Africa’s unemployment rate stood at 34.5%. Can we afford to lose more employment opportunities? 

    What Is the Reason for These Interest Rate Increases? 

    Inflation is the problem, but hiking the interest rates is far from the solution. In this case, a high-interest rate is not enough to fight inflation.

    Why not? Because the interest rate hikes we are currently experiencing are not a result of demand-driven inflation, as some might assume, but rather imported inflation. Imported inflation is a price increase caused by the increased cost of imported products. Imported inflation is caused by external factors, such as oil prices and the Russia-Ukraine War. 

    How Can We Combat Inflation and Minimise Interest Rate Hikes?   

    The correct policies must be implemented to control imported inflation and avoid further interest rate hikes. There aren’t many long-term solutions available, but price controls, a fixed exchange rate, and supply side policy are three options governments might consider. 

    A monetary policy is another option, but this, unfortunately, requires an increase in interest rates.

    South Africa’s Interest Rates Over Previous Years

    The historically low rates of 2020 and 2021 impacted the residential real estate market positively.  According to Seeff, a benefit of this low-interest rate is that it gave more first-time home buyers an opportunity to purchase homes

    However, this overall increase in properties sold was not as high as you might have expected. This is because the 30% reductions dragged the interest rate to the lowest level in over five decades. 

    When we look back on 2021, we see that sales volumes peaked at over 21,000 per month on average. Yet this is not all good news, as it is still significantly less than the highs of the mid-2000s boom period, which on average, saw volumes in the upper 30,000s (and much higher interest rates, too).

    Interest Rates During the COVID-19 Pandemic 

    During the COVID-19 pandemic, interest rates were low, and it was a great time to buy a house. First-time buyers, in particular, took advantage of these conditions. The fact that banks were also very willing to offer loans helped give buyers a boost, too. According to the National Credit Regulator, the number of home loans granted in the second quarter of 2021 was up 41% compared to the same period in 2019.

    What Is the State of South Africa’s Rental Market?

    While the interest rate hikes are impacting transaction volumes and forcing homebuyers to reconsider purchasing their dream home, the rental market is going strong. 

    The luxury real estate market is performing very well, drawing local and international tenants. Property Practitioners are even achieving record high prices in prime spots such as the Atlantic Seaboard and Constantia Upper. 

    There is no doubt that South Africans are living in unprecedented times. Has the Reserve Bank taken a one-dimensional approach to a multi-dimensional problem? Seeff believes this could be the case. Seeff calls on the Reserve Bank to minimise further rate hikes.

    couple browsing properties on laptop

    If you were hoping to buy a house in 2022, perhaps you’re wondering if it’s still a good idea in light of the interest rate hikes. Read Seeff’s blog on the state of SA properties for more guidance.

    Author: Seeff Property Group
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