Marginal short term impact on property expected from interest rate hike

Last week’s surprise 0,5% interest rate increase taking the prime rate to 9% has people asking what next and pondering the effect on the property market among other sectors.

On its own a half-a-percent increase in interest will have no real effect on the property market. Should interest rates continue upwards by two or so percent as some are predicting, then we could well see a change, said Myles Wakefield, CEO Wakefields Real Estate.

The irony of the interest rate hike attached to the weakening of the Rand is that the US economy is strengthening as its leaders work on getting their house in order.

“We need to remember that a number of factors play a role in the property market. Historically we have had a booming property sector despite interest rates that varied from 11% to 14,5% between 2004 and 2007 respectively,” said Wakefield.

SA needs to get its economy growing and consumers need to save. Emerging economies that have a sound savings base are not being affected by the strengthening US economy, while SA with a zero savings base is feeling the pinch. This interest rate increase is a clear signal to consumers to reduce their credit and start saving.

There is no reason for the property market not to continue to be cautiously positive.  For sellers a rising interest rate environment means that it may be more difficult to get a double digit increase on their house price. It does mean that buyers who have the financial means and their credit record in order will continue to have the upper hand.

On a R500 000 bond over 20 years the new interest rate will mean that homeowners will to pay an additional R159.51 a month. Homeowners with a R1 million bond over 20 years will pay an additional R319 a month.

FNB’s latest property report shows that the average house price increase for 2013 was 6,8% with December showing a year on year house price growth of 8,7%. The result is that on a national level the average house price rose to almost R892 000 compared to about R835 500 of 2012.

“An 8,7% growth in house prices is around what we are experiencing in the greater Durban area with demand far out stripping the supply of property. In virtually all suburbs there is a shortage of good property for sale and to a large degree this is driving prices,” said Wakefield.

A big consideration is mortgage lending. If lending continues to improve then there is a good chance that the property market will improve. The National Credit Regulator figures show that of the total 6,8% of household credit extended in the third quarter of 2013 as much as 20% of this was mortgage lending.

Supply and demand is going to continue to play a big role this year. Building activity on a national level in 2013 has been a mere 3,2 %. The result is that the gap between supply and demand is closing and is at its best level since 2008. When demand exceeds supply, as is the case in Durban, then property prices will start to rise.