The repurchase rate, otherwise known as the repo rate, is the official interest rate that the South African Reserve Bank (SARB) charges commercial banks in the private sector (such as ABSA, Standard Bank, Nedbank and FNB) to loan money to them. The banks then charge a higher interest rate, known as the prime lending rate, to clients looking to borrow money from them in order to make a profit.
It was announced at the Monetary Policy Committee (MPC) meeting in January that the repo rate would remain steady at 5.75%, with the prime lending rate on home loans at 9.25%.
The repo rate had remained unchanged since the 25 basis points (bps) rate hike in July of last year – the MPC kept the borrowing costs unchanged in an effort to relieve pressure on an economy weakened by electricity supply constraints and strikes. In July of this year it was raised by 25bps, and at the SARB November meeting the repo rate was hiked a further 25bps to 6.25%. The prime lending rate was also increased to 9.75% from 9.5% in July. This was said to be a result of an increase in inflationary pressures.
Growth and inflation outlooks for 2016 and 2017 have subsequently deteriorated due to a significant increase in the risk factors affecting the forecast. Drought conditions in major food-producing areas have worsened, causing uncertainty and alarm at the prospect of having to import food staples next year, raising food prices. Rising electricity costs and a weakening rand have further subdued economic growth.
Conclusively, the interest rate hike, although ill-timed, was not entirely unanticipated given the state of the economy and other contributing factors.
How will the Rate Hike affect the Property Market?
Stability is vital and balance within the market is of the utmost concern. A steady repo rate builds and retains confidence in the residential housing market, whereas hiking cycles adversely affect consumer confidence and affordability.
Up until this point home-buyers and investors have taken advantage of the relatively low interest and inflation rates by acquiring home loan finance at affordable costs of credit, which have supported growth in property sales.
The property market has continued to reflect stable recovery and growth in residential property values, particularly in high-demand areas, over the last few years amid mounting economic pressures. It remains one of the few sectors achieving overall balance. All the same, the rate hike has come at a bad time! The festive season is around the corner and with rising costs, reduced affordability and poor consumer confidence, the repo rate hike is sure to reflect a decrease in the volume of sales transactions and the demand for rental property in the coming months, especially in the higher price bracket.
The decision to increase the repo rate is predicted to have the greatest impact on consumers already under financial strain due to increased debt levels and a rise in food, electricity and petrol costs.
Affordability issues have had an obvious influence on the decline in consumer confidence regarding the property industry. Prospective homebuyers requiring access to home loan finance are left no other option but to continue to rent as proposed bond repayment instalments become more and more unaffordable. Home loan finance isn’t the only credit affected; credit on personal loans, microloans and credit cards will become more expensive.
Consumers who are unable to secure bond finance fuel the demand for rental property – this remains good news for buy-to-let investors!
Mortgage-dependent homeowners, on the other hand, may find themselves in a position where they are forced to sell in order to downscale due to financial pressures. Oftentimes this hasty approach can jeopardise their investment returns, but taking into account the residential stock shortage and using it to their advantage places sellers in a good position to get their asking price.
The worst affected will be those just getting by as it is. Nevertheless, those in the financial position to rent or buy will continue to do so – supporting the sustained demand for quality property and driving an increase in house prices; this despite the increase in the interest rates affecting their monthly bond repayments. Stock shortages continue to dominate the housing market as demand for correctly-priced property far outstrips supply.
All homeowners and prospective property buyers are encouraged to be responsible in their spending and diligent in their saving. The overall forecast for 2016 & 2017 does not promise a quick recovery; however the property market has demonstrated its resilience in recent years and continues to do so.