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Leading estate agents diverge on how high interest rates will rise

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While unsurprised by the rate hike last week (9,75% to 10,25% per annum) estate agents are at variance over how high they may still go. What they do agree on is that as an investment, property is the safest bet.

Lew Geffen, chairman of Lew Geffen Sotheby's International Realty.

Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty.

The hike is just “just going to add more pressure” on consumers, in the words of Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty. We’ve already had a 2% increase and expect another 1% hike this year. Together at 3% since two years ago, this will impact most on lower priced homes where affordability becomes a huge issue. Add to that the past increase in transfer duty from 8% to 11%, that is up by 30%, plus all the other cost factors such as food, the R1,5m and below market is going to contract and a recession felt most here.

“The mid to upper luxury property market will not be so badly affected,” he says. “Rather, as an investment class, it will be viewed as the only rand hedge that has some substance; the rand and the stock market by comparison are too volatile to offer any relief.”

He points to record sales in Cape Town at the end of the year as evidence of investment purchases.

The interest rate hike may not have been unexpected, but for consumers it’s a lot to chew on, opines Harcourts Africa CEO, Richard Gray.

Harcourts Africa CEO, Richard Gray.

Harcourts Africa CEO, Richard Gray.

Gray, whose real estate agency is head-quartered in Durban and has some 130 offices countrywide (part of the international Australian Harcourts group), says the hike will definitely have an effect on lending for the simple reason that customers are simply not going to be able to afford more. On the flip side, people who have bonds they cannot afford will downscale, which will create activity in the market. But sentiment will be negatively impacted.

“Our advice to prospective homeowners is not to let the interest rate hike hurt your credit records,” says Gray. “This is a time to keep accounts up to date. For buyers who are able to afford the interest rate increases, this is a favourable time to invest in real estate as the seller’s market of the last year, characterised by stock shortages, will see reduced demand and swing back to a buyer’s market, a far healthier, balanced market, we expect, where property will be correctly priced.

“All in all,” says Gray, “this will be a tough year for the consumer where the mantra will be only to spend money on what you need. It will help the rental market and we anticipate there will be a higher demand for rentals with prospective buyers postponing their decisions to purchase homes.”

Despite slowing economic growth in 2015, the Harcourts Africa group experienced a 20% increase in turnover, a record year for the agency, which he attributes to a burgeoning middle class. Greater Gauteng, for example, showed strong growth, but Gray points to the biggest growth taking placed in Stellenbosch, Ballito and the upper end of the market.

Dr Andrew Golding, CE of the Pam Golding Property group.

Dr Andrew Golding, CE of the Pam Golding Property group.

For Dr Andrew Golding, CE of the Pam Golding Property group, last week’s decision  is likely to create a further dampening effect on housing demand as consumers are already exercising a more conservative and considered approach to both buying and selling.

“This increased caution is not surprising as disposable incomes remain under pressure, against a backdrop of rising inflation, further eroded by above-inflation increases in municipal rates and utility tariffs and as economic growth remains stunted,” he says. “While doom and gloom merchants commentating on the property market abound, a more pragmatic approach presents a different picture.

“First, given the volatility being experienced in financial markets, exchange rates, stocks and commodities, many analysts are seeing property – bricks and mortar – as a sound investment and rand hedge. Property is globally recognised as a means of wealth creation and here in South Africa it is increasingly sought after among the new generation of young, first-time buyers. For example we are seeing that activity in the below R1m price range still seems to be limited mainly by a lack of supply, and not a lack of demand.

“While many market commentators are suggesting that interest rates will rise by about 100-125bps during the course of this year (2016), even if these anticipated increases occur, interest rates will remain low by historical standards and, with inflation heading upward, the increase in real rates (taking inflation into account) will be more muted than the hikes in nominal interest rates suggest. One must bear in mind that at the height of the global economic crisis the prime rate in South Africa reached 15.5%.”

Golding does not anticipate interest rates will be raised by several percentage points as in the past. In general, households have reduced their debt in the wake of the 2008 crisis so they will not necessarily be as sensitive to higher interest rates as they were at the time of the global financial crisis. Further, those employed in the public sector – the largest source of employment in South Africa – continue to receive above-inflation salary increases, with areas such as Pretoria, for example, benefiting from public sector house buyers. Interestingly, other nodes such as the Cape Town metro and booming KwaZulu-Natal North Coast corridor continue to reflect high demand, with sales performance bucking national trends.

“Although house price growth has slowed, nominal prices are currently at record highs of approximately R1,386m (Source Absa) while the real price (ie taking inflation into account) is just 10% off its record highs pre-crisis of August 2007. This follows because in South Africa we have a rapidly growing, young population for whom there is insufficient housing, so there is little reason to expect house prices to fall outright. In addition, while continuing to apply stringent lending criteria, the banks have over the past year shown a tendency to compete for mortgage business, a trend which is expected to continue.

“Looking internationally, in 2008 world GDP was negative, compared with this year’s growth forecast of 3.4%, so the global backdrop is not as dire. In 2009, South Africa’s GDP was -1.5%, but in 2016 we are looking at some +0.7% to 1% which is still positive,” says Golding. “While our inflation rate in Q3 in 2008 reached 13.2%, this year (2016) it is likely to be between 6% to 7% – in other words, half that level.”

Samuel Seeff, chairman of the Seeff Property Group, believes the rate hike is going to be the first of many and that property is in for a bumpy ride.

Seeff, MD, Samuel Seeff.

Seeff chairman Samuel Seeff.

“By now, consumers should also be aware that this is the first of more hikes to follow” says Seeff. “Interest rates could rise by as much as a full 1% to 3% this year, especially in the event of a credit downgrade to junk status.”

He agrees with Golding that “although it is not good news for consumers, it does send a strong message to the international ratings agencies and investors that the Reserve Bank is serious about curbing inflation and protecting the value of the rand”.

The market has had some time to prepare for the rate hike, Seeff adds. Basic living and property costs will climb considerably, as will mortgage loan costs. Affordability is going to be the key theme for the property market this year.

Buyers will be looking very closely at prices and will be driving a hard bargain as they know that the market is getting tougher. The average price growth will deteriorate further and we may even see negative equity growth when we adjust for inflation.

Seeff believes that although the market will absorb the rate hike, there will no doubt be a knock-on effect. The affordable and middle-income sector will feel the effect the most.

“Although we do not expect the banks to tighten their lending criteria any further, it will become tougher for first-time buyers,” he says. “Bigger deposits may well become necessary which is also not a bad thing for the market as it creates a financial buffer to an extent.

“For now, though, we are still sitting with a fairly healthy housing market, packed with plenty of demand. Buyers are still eager and show house attendance is still at much higher levels than what it was five years ago.

“This provides some insulation against some of the economic headwinds,” continues Seeff. “The market is stronger than what it was in the immediate aftermath of the 2008 global credit crisis. Stock levels remain tight and we do not have to contend with the volume of distress that inhibited sales and price growth post 2007/8.

“Having said this, for a good property market, you need a good economy. Both are heavily sentiment and confidence driven. So, while property will remain an attractive investment this year, the economic decline and deteriorating confidence is a serious concern.

“Consider, for example, that while the decline in the value of the rand is seen as a boon for foreign buyers, it is also a cause for concern as to the value of their investment. In October last year, you would have bought at R17 to the British Pound. By December, the rand – and your investment value – had declined by 18% to around R20 to the Pound.”


Alison Goldberg is the former property editor of Business Day (1985) and the Financial Mail (1991-99). In 1995 she won the Sanlam Financial Journalist of the Year Award. She has edited such titles as National Constructor and The Miner in Australia and has freelanced for The Star, The South African Jewish Report and The Jerusalem Post.

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