Will higher rates slow the market?

Later this month the Reserve Bank Monetary Policy Committee will hold its third meeting of this year to determine whether the prime interest rate will remain at its current rate or be changed. “With the weakness of the rand and rising inflation placing pressure on Reserve Bank, we will see the interest rate climbing over the remainder of the year,” Adrian Goslett, CEO of RE/MAX of Southern Africa, predicts.

“At the previous Monetary Policy meeting held in March this year, Reserve Bank Governor Gill Marcus warned that future rate hikes were on the cards. She pointed out that while the interest rate would not go up at every meeting – it would go up by varying increments throughout the year. We know that the interest rate is going to increase, so how does this impact on the property market?” asks Goslett.

With the majority of potential homebuyers loan-dependent, fluctuations in interest rate levels will take their toll on the property market to some degree. Aside from the increased cost of credit and higher repayments on bonds, as soon as interest rates start to move up, there is often a sense of panic among consumers that the property market is headed for trouble. While this is often not necessarily the case, the negative perception among consumers can have an impact on the property market. However, the perception of what is happening in the market is often far from the complete story.

“The fact is that while interest rates will have their influence on activity in market, the property market is doing well and is likely to continue along that path. Sales volumes are increasing and in certain markets property prices have recovered exceptionally well, which proves that demand for property is healthy. Well-maintained homes that are marketed at fair market value are selling within a good time frame and buyers still value homeownership,” says Goslett.

“Even though we may be seeing smaller gains in terms of property prices and sales than we did during the boom, for the most part trends suggest that we are in a far more stable property market environment than we have seen since the recession hit in 2008. While it is important for home prices to continuing growing, it is equally important that property remains within an affordable range for buyers with steady incomes to feel more confident about their home buying prospects.”

Goslett says that current interest rates are still highly favourable for buyers and will only make a noticeable impact on the market if they are raised significantly. “Currently interest rate levels are still deemed as being relatively low, considering that they have dropped by around 5% since the peak of the boom. Essentially what this means is that while we have recently seen a hike in the interest rate, those who have had a bond since the boom are now paying far less for their property because the interest has reduced.”

Although increases in the prime rate will mean that the cost of credit to consumers will be higher, affordability levels are of greater concern for the future of the property market. Affordability levels of buyers will be directly affected if interest rates climb too high. “With banks placing a lot of emphasis on affordability ratios, hikes in the interest rate could make it more difficult for aspirant homebuyers to show the necessary levels of available finances for bond approval. However, interest rates are not the only aspect that impacts on the buyer’s ability to afford a home. The buyer’s personal finances can play a far greater role in determining how much the buyer will be able to repay on bond installments. A rise in the interest rate will have less of an effect on the buyer’s affordability ratio than say a new car or high levels of credit card debt,” says Goslett.

He notes that future rate hikes will place more pressure on buyers to pay off debt wherever possible and as soon as possible. Reducing debt levels will increase the applicant’s chances of bond approval and make affording a home far easier.

“While the interest rate increases will be challenging, it will not derail a buyer’s plans to own property, as long as they can focus on paying down debt whenever possible. The current property market holds a number of opportunities available to aspiring homeowners who should make the most of it while they can,” Goslett concludes.

Author: Wesley Barnard from Squared Communications.
More Info link: https://remax.co.za
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