Homeowners must 'hang in there’ as interest rates remain high

Homeowners must keep prioritising their bond repayments while they wait for interest rate cuts. Picture: Garon Piceli/Pexels

Homeowners must keep prioritising their bond repayments while they wait for interest rate cuts. Picture: Garon Piceli/Pexels

Published Sep 20, 2023


South African property owners – both residential and commercial, are awaiting Thursday’s interest rate decision with bated breath as they struggle against the rising costs of living and operating.

Many may even be hoping for a rate cut but the most likely scenario is that the repo rate will hold steady following the Monetary Policy Committee meeting.

If this is the case, Carl Coetzee, chief executive of BetterBond, urges homeowners to “hang in there” and prioritise their monthly bond repayments while they weather the economic headwinds.

First-time buyers looking to invest in their first homes should also not be deterred by the current rates climate.

“Affordability is always a consideration when buying property and those who have budgeted and qualified for a bond now, while the repo rate is at the top of its cycle, can look forward to lower bond repayments in the next few months when the repo rate starts to drop.”

Now is, in fact, a good time for first-time buyers to invest in property, as the repo rate is expected to stabilise over the next few months, meaning these buyers can redirect the money they save on their bond repayments to meeting other household expenses,” he says. Working with a bond originator could also help a buyer secure a more favourable interest rate.

Samuel Seeff, chairman of the Seeff Property Group says buyer’s market conditions are now evident almost across the whole country, even in most areas in Cape Town. Although buyers are facing a higher interest rate, they can generally find a good deal in the market, and if they can afford it at the current interest rate, they will benefit once the interest rate comes down again.

“For sellers, the reality is that there are fewer buyers, and they have more stock to choose from. Buyers are dictating the pace in the market. If you want to sell right now, you will need to listen to your agent in terms of pricing; if you price too high, you may lose out.”

While fuel price increases will impact inflation, Coetzee echoes the belief of other experts that the rate won’t be hiked at this stage.

“Continued drops in the inflation rate – albeit still above the midpoint target – bode well for a downwards shift in interest rates.”

Rate cuts, however, are only expected to come next year.

The commercial property sector is also holding out for continued interest rate stability that is required to settle valuations in the market. John Jack, chief executive of Galetti Commercial Real Estate, says the rapid fall of interest rates during the Covid pandemic, followed by the rapid ascent over the past two years, has led to increased volatility, making it difficult for the market to find its footing in terms of valuations.

“Buyers tend to try and price ahead of the curve, pushing the market to unrealistic levels on the bid side.”

Ahead of Thursday's rate decision, he explains what the three possible rate announcement scenarios could mean for commercial property asset classes:

Scenario 1: Rate Hold

While the current prime lending rate of 11.75 percent is the highest it has been in a decade, keeping it stable is still preferable to a rate hike.

“Doing so would allow the three major commercial property asset classes of retail, office, and industrial, to continue the slow recovery they’ve experienced since early 2022, when the major economic pressures of the pandemic started to ease.”

Retail witnessed a robust recovery in 2022, driven by consumer return to brick-and-mortar stores. The township retail sector has also seen remarkable growth, fuelled by increased purchasing power in these areas and a preference for cash purchases among these shoppers.

While rising food inflation costs have deterred some shoppers from major grocery retailers, he says the ongoing load shedding crisis has resulted in sky rocketing operational costs for alternative power sources to protect the integrity of the food hygiene chain.

“A rate hold scenario could allow retailers some recovery, as well as the consumer.”

Scenario 2: Rate hike

While this would be challenging for all three asset classes, none would be harder hit than the struggling office sector which is grappling with oversupply. The Rode’s Q2 2023 State of The Property Market Report finds that REITs are still generally reporting large negative office rental reversions as contractual rentals have outpaced market rental growth. The outlook for sector recovery is clouded by the post-pandemic hybrid and remote working trend which has increased vacancy rates.

However, Jack says Rode's Report for offices offers “a glimmer of hope”, with nominal rentals for decentralised grade-A office space increasing by 3.5 percent in the past year, and indicators suggesting that rental demand levels have now stabilised after a sharp drop during the pandemic.

“Selling and auction bidding prices for commercial properties would be an increased deviation from realistic pricing levels, and we could expect investment financing to dry up in a rate hike scenario - especially in the new development space.

“Investment financing is crucial to the recovery of the office sector and this scenario would severely compromise the affordability of investors.”

Scenario 3: Rate cut

This decision will be a major help in stimulating South Africa’s sluggish economy and buyers will rush into the market to capitalise on high-yielding properties before valuations adjust.

“Even the logistics sector, the top performer of the asset classes by a large margin, has felt the impact with the Rode’s Report showing weaker rental and stand value growth. Industrial property building activity also slowed down, hampered by inflated material costs, and delays due to load shedding,” he says.

Furthermore, higher vacancy levels are predicted in the coming months if the sector does not receive a boost in the form of interest rate cuts to stimulate demand.

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