South Africa’s residential property market has shown resilience in the past two years, emerging stronger from the pandemic and remaining robust in the midst of the civil unrest and inflationary pressures and it is expected to continue to hold its own in the face of the ongoing Russian-Ukraine conflict.
“This is not to say that a protracted conflict will not have an impact on the housing market”, says Carl Coetzee, CEO of BetterBond. “Rising oil prices as a result of the tensions in Eastern Europe may well have a knock-on effect on inflation in South Africa, leading to escalating interest rates. SARB has forecast nominal 25-basis point interest rate hikes for the next 3 years, but these increments may increase as inflation rises”.
Bloomberg reports a strong chance of a 50-basis point increase, the largest since January 2016, when the Monetary Policy Committee meets on the 24th of March 2022. This will take the prime lending rate to 8%.
“However, the solid fundamentals already in place will buffer against these pressures. More than a year of record-low interest rates have strengthened the property market so that it is able to withstand these geopolitical shocks,” he says. BetterBond is still reporting upward trends in the volume of bond applications for the 12 months ending in February. “The number of application approvals increased by 9.2% over this period, while the number of formal grants increased by 14.2% – higher than the growth of 13.3% recorded for the previous year.”
As FNB reports, much of the current buyer activity is at the upper end of the market, where home buyers are less sensitive to interest rate increases. “So, while increased interest rates may subdue market volumes, there will still be pockets of positive growth. Bonds granted for homes of more than R3 million currently account for 7% of all BetterBond’s formal grants, an increase of 44% over the past 12 months. There has also been an almost 26% increase in formal grants for homes of between R2.5 million and R3 million”.
Rising interest rates have not dampened property prices across the board, and BetterBond reports that the average home purchase price is up 11% in the past 12 months (January data), to R1.37 million. The average purchase price was R1.2 million for the 12 months ending January 2021. Despite not being as active as in 2021, shortly after lockdown restrictions eased and interest rates hit a record low of 7%, the average purchase price for first-time homebuyers has also increased by 11% to R1.15 million. First-time homebuyers were paying on average just over R1 million for their homes in 2021.
“It is also worth remembering that property has established itself as a resilient and safe asset class, especially during turbulent times. This could lead to investors seeking to shore up their portfolios by focusing on property. The interest rates are still accommodative enough to make this a sound financial decision,” says Coetzee. Furthermore, while there’s no denying that the cost of living is rising – with electricity tariff hikes and fuel price increases on the horizon – rising inflation does have a related effect on the value of your home.
“If interest rates are relatively low, as they are now, this means that the value of your home is increasing at pace with inflation, without you having to pay that much more into your bond each months. Should the interest rate go up to 8% later this month, it will mean an increase of R617 a month on a R2 million bond, taking the monthly payment from R16 112 to R16 729. While this is admittedly an added expense at a time when household costs are rising, there is peace of mind in knowing that property is still a good asset investment during uncertain times.”
