July interest rate announcement predictions & savvy tips for homeowners and buyers.
Category Economy
Debt holders brace themselves ahead of the next interest rate announcement to be held on 20 July 2023. Most experts predict that interest rates are likely to increase by another 25 basis points.
On 25 May 2023, the South African Reserve Bank's Monetary Policy Committee raised the repo rate by a further 50 basis points to 8.25%, leaving the prime lending rate at 11.75% - the highest it has been since 2009.
Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, explains that the main purpose of these interest rate hikes is to bring inflation back within the Reserve Bank's target range of between 3-6%. "When you review the interest rate hikes alongside inflation statistics over time, you can see how each increase has had the desired effect of incrementally bringing inflation down," he explains.
If you take a more historical view on the stats, Goslett also points out that as soon as inflation hits the MPC's target range, interest rates begin to stabilise. "Homeowners can take some solace in this because it indicates that, if we continue to follow historical trends, then an end of interest rate hikes is most likely in sight."
Goslett reiterates that, much like the economy, the property market works in cycles. "For every high - much like we experienced post-COVID - there is a low to follow, as we've been experiencing over the last few months. This ebb and flow is completely natural and should not be cause for concern for homeowners and investors," he states.
The main priority now is for homeowners to find ways to stay on top of their debt repayments. "Until interest rates begin to stabilise and hopefully decrease over time, homeowners will need to work carefully with their budgets to ensure that there are no late or missed payments. If the past is anything to go by, we are hopefully nearing a time of stabilisation which should bring some respite to homeowners," he states.
Those who simply cannot find the room in their budget for the next possible interest rate hike are advised to seek help from a professional financial advisor before the next interest rate announcement occurs. "Being prepared will make all the difference when it comes to building greater financial freedom. Never be afraid to speak to the professionals and reach out for help when you need it," he says.
If interest rates increase next month, how will it impact the monthly payment on a bond?
Yael Geffen, CEO of Lew Geffen Sotheby's International Realty, says consumers shouldn't expect any interest rate relief from the Monetary Policy Committee (MPC) meeting this month. The repo rate definitely won't go down, and it'd be nothing short of a miracle if the MPC left it unchanged at 8.25% (which makes the current prime lending rate 11.75%). We're almost certainly in for yet another hike - optimistically 25 basis points, but very possibly another 50 basis points as we saw in May.
Our economic realities are a tanking currency, 14-year food inflation highs, abysmal unemployment numbers that amount to a national crisis and declining household income.
Since November 2021 home owners with fairly modest R2 million bonds have been slammed with increases of more than R6 000 on top of the monthly mortgage repayments they were already making.
There is a limit to the amount of belt-tightening society can bear, and I believe we're close to reaching it. Poverty levels are rising, and skilled individuals are leaving in droves.
We simply can't afford to lose any more.
Responding to a Parliamentary question tabled in April, Finance Minister Enoch Godongwana said 32 831 individuals changed tax residence in the period between the 2017 and 2021 tax years - in other words, emigrated.
He said further: "Of those individuals, 2 788 earned taxable income greater than R500 000 p.a. A total of 1 125 earned more than R1 million p.a., equating to R1.3 billion in taxed assessed during 2021."
Just five years ago the average rand/dollar exchange rate was R13.24, which has plummeted to this year's average of R18.23.
Godongwana was saying indirectly that South Africa is experiencing a massive economic exodus - an exodus of people who were heavily invested in the country's property market.
For those left behind, a higher repo rate means higher bond repayments and a crushing debt load on already overburdened South Africans. It's a grim but realistic forecast of what's ahead.
Samuel Seeff, chairman of the Seeff Property Group, says that while we are aware that Reserve Bank Governor, Lesetja Kganyago has signalled that a further interest rate hike, of a potential additional 25 basis points appears to be on the cards in view of the persistently high inflation, we would urge the bank to consider holding off on this.
"We are already seeing the impact of this year's interest rate hikes on the property market, and it is now becoming a too high a burden for consumers and home buyers.
"We are in a market which offers favourability for buyers given that bank lending conditions remains at the best levels for over a decade combined with flat price growth which makes it an excellent time to buy," says Seeff.
Both the economy and property market can do with a much-needed boost and a flat interest rate can go a long way towards that.
In addition to last year's hikes, the market has already had to contend with an extra 1.25% in hikes this year, with potentially another 25% on the cards towards the end of July.
Based on increases since January this year alone, someone with a bond of R900,000 is already paying an extra R768 (repayments up from R8,985 at the beginning of the year to R9,753), and on a bond of R1 million, an R853 (from R9,984 to R10,837), and on a R2 million bond, an extra R1,706 (from R19,968 to R21 674).
In the event of a 25bps rate hike (base home loan rate of 12%), monthly bond repayments over a 20-year term will increase by approximately:
R750 000 bond - extra R130 from R8 128 to R8 258
R900 000 bond - extra R157 from R9 753 to R9 910
R1 000 000 bond - extra R174 from R10 837 to R11 011
R1 500 000 bond - extra R260 from R16 256 to R16 516
R2 000 000 bond - extra R348 from R21 674 to R22 022
R2 500 000 bond - extra R434 from R27 093 to R27 527
Leonard Kondowe, Finance Manager for Rawson Finance, says South Africa's economic woes are weighing heavily on consumers with high inflation, there is a chance that the MPC will increase the repurchase rate by 25 basis points again. However, should inflation return to the midpoint of the target range, then there is an expectation of no raise. While today's interest rates may seem dire by recent standards, it's important to maintain a little perspective. Back in 1985, interest rates hit a high of 25%, reaching almost as high again in 1998 to around 24.50%, today's 11.75% pales in comparison. The real challenge isn't how high the interest rate is, but how quickly it's gotten here. We grew accustomed to cheap finance during COVID, and getting back to reality has been a shock to the system.
Kondowe, says, thankfully, there are options available to help struggling bondholders weather these tough times which include bond renegotiation (for bondholders with equity), debt restructuring and even debt consolidation for those with multiple loan accounts. The first step is to approach your lender - the sooner the better. Never wait until your situation is critical, and always focus on paying off - and closing out - your most expensive debt first.
Additional advice for buyers entering the market:
"It's important to think ahead in terms of affordability. Banks do some of this work for you by taking interest rate fluctuations into account during their affordability assessments. That said, it's not wise to rely on this, alone but rather buyers should ensure that their monthly repayments start off at a level where they can safely afford interest rate increases of at least another percent or two. This can either be done by buying below their maximum qualified amount threshold, or by opting into a longer loan term of 30 years instead of the usual 20," says Kondowe.
Berry Everitt, CEO of the Chas Everitt International property group, says the Reserve Bank (SARB) may well take a lead on interest rates from the US Federal Reserve, which is widely expected to resume raising its benchmark rate this month after a pause in June as it battles unusually stubborn inflation.
"This means that we can probably expect at least another 0,25 percentage point increase after the MPC meeting, which would boost the repo rate to 8,50% and the prime rate to 12%.
"This would be the 11th consecutive rate hike by the SARB since November 2021, when the prime rate was at 7%, and would add around R70 to the monthly repayment on a 20-year home loan of R1m.
"However, it would take the total increase in that repayment over the past 18 months to more than R3200 a month. Add this to steep increases in the cost of living and the instalments on any other debts they may have, and it is no wonder that many households are really struggling to make ends meet."
In May, he notes, SA's annual inflation rate fell to 6,3% from 6,8% in April. "This was below market forecasts of 6,5% and close to the top end of the SARB's target inflation range of 3% to 6%.
"However, we do not expect this to influence the SARB to stop raising rates just yet because at the previous meeting of the MPC, Reserve Bank Governor Lesetja Kganyago, said the committee felt there was still significant upside risk for inflation, and actually raised the SARB's inflation forecast for the year to 6,2% from 6% at the beginning of the year.
"Currency weakness and load-shedding, in particular, are the factors putting upward pressure on inflation because they raise the consumer prices of fuel and transport, food and other household goods- and these prices are still rising on a month-to-month basis. In addition, most major municipalities have introduced tariff increases for water and electricity supplies this month, and these can be expected to sustain higher inflation over the next few months."
Consequently, says Everitt, even if the MPC decides to give consumers a break and keep rates the same until its next meeting in September, the tough times are not over yet, and it is going to remain difficult for homeowners to make their bond repayments - and more difficult for first-time buyers to qualify for bonds and become owners.
"Our advice to consumers is thus to keep cutting their living costs wherever they possibly can, and to keep paying off as much debt as possible."
Gerhard Kotzé, CEO of the RealNet property group, says that while consumers would no doubt be delighted if the Reserve Bank would stop raising interest rates now, this does not seem likely just yet, and that an increase of 0,25 or even 0,50 percentage points is likely when the MPC meets later this month.
"The immediate effect of this would be to raise the repo rate to at least 8,5% and the prime rate to 12% - or its highest level since 2009. All repayments on all forms of debt - including credit and store card balances, vehicle finance, personal loans and bond repayments would also immediately go up again, for the 11th time in 18 months.
"This series of rate hikes has pushed the base home loan rate from 7% to 11,75% currently, and that has already had a major impact on first-time homebuyers looking to enter the property market from a financing and affordability point of view. It is also making things increasingly difficult for existing homeowners with bonds, whose monthly repayments are now hundreds or even thousands of rands higher, despite the fact that most salaries have not gone up as much as interest rates, and that the buying power of those salaries has been severely eroded by high inflation."
And, he says, since the effect of every rate hike only really hits consumer pockets about six months later, the full effect of the May increase is only due to be felt around November, with any increase that may be announced this month carrying through to January 2024.
"We also believe that there will be at least one more rate increase this year, meaning that the real estate market will remain suppressed until mid-2024 and possibly until early 2025, depending on when rates start to come down again."
According to Dr Andrew Golding, chief executive of the Pam Golding Property group: Three different measures of inflation have provided positive news on the inflation front in recent days - the PMI purchasing price index, and producer and consumer inflation. After surprising on the upside for two consecutive months (February and March), consumer inflation has now surprised with a better-than-expected reading for two consecutive months (April and May) and is currently marginally above the upper limit of the Reserve Bank's inflation target at 6.3%.
"With global food and energy prices subsiding and the rand having regained some of its earlier losses - allowing for petrol price cuts last month (June) and this month (July) - coupled with a high base last year, the current easing trend in inflation is likely to continue during the remainder of the year.
"Based on these factors alone, the Bank may well be tempted to halt interest rate hikes - which has seen the prime rate rise from 10.25% in late 2019 (before Covid) to a low of 7% for more than a year - at the current level of 11.75%. This at a time of extremely weak economic growth.
"However, the Bank will be cautious in the face of a still-hawkish Fed, which has signalled that it is still likely to hike rates later this year. The Reserve Bank will also undoubtedly be concerned about future bouts of rand weakness and any increase in the severity of loadshedding, which would increase costs for businesses. Finally, it is thought likely that the Bank will look closely at inflation expectations (due this week) to see if the business sector, unions and analysts continue to anticipate higher prices - requiring further rate hikes to dampen price pressures," says Dr. Golding.
Analysts are currently fairly evenly split between those forecasting one final 25bps rate hike and those who believe that interest rates have reached a peak in the current cycle. It is an unusually close call and it will be best to monitor developments between now and the MPC meeting to see which way the bank is likely to move.
In the event that the Bank does hike rates, this really is likely to be the final hike of the current cycle.
Based on the Property24 calculator:
R1m bond - 11.75% prime, monthly instalments are R10 837
-12% prime, monthly instalments are R11 010
- an increase of R173 a month
R2m bond - 11.75% prime, monthly instalments are R21 674
-12% prime, monthly instalments are R22 021
- an increase of R347 a month
A 25bps hike on its own does not increase bond repayments significantly but considering the fact that rates have risen from 7% to 11,75% or 12% - the impact is more pronounced.
Market:
Recent Pam Golding Properties research showed that even as overall housing activity has slowed, sales in major metro areas have remained buoyant, as young adults continue to be attracted to key business nodes to start careers and ultimately purchase homes.
While employment prospects ensure the enduring appeal of housing markets in all major metro nodes, lifestyle considerations continue to encourage relocation by those who are able to, to destinations, including smaller towns, where the way of life is more appealing and house prices are more affordable.
The appeal of sustainable municipalities is clear in the surge in investment/buy-to-rent demand in the Western Cape, indicating that even if homebuyers are not able to move immediately, there is a groundswell of those who wish to participate in the Western Cape housing market with a view to retire or relocate there when possible - or at least to benefit economically from this still buoyant housing market.
At the top-end luxury sector of the residential property market, and despite the current constrained economic trading conditions, there are several niche markets in prime nodes which continue to attract affluent buyers from around the country. These include Tshwane, Johannesburg - such as Sandhurst and Hyde Park, Steyn City in Fourways, Durban - including Morningside, Westville, uMhlanga and Brighton Beach, and Ballito/Zimbali, as well as the Western Cape - including the Garden Route. Furthermore, the top-end of the Cape market has shown itself to be resilient and insulated to some degree from the rest of the market with international buyer demand in this segment featuring prominently.
These 7 "hidden" areas in which you might be losing money, and some tips on how to plug the leaks:
These tips, shared by Everitt, in 2018 May could help you pay off your debt faster and assist in keeping up with bond repayments.
1. Food waste
Even if it seems cheaper to buy fresh food in bulk, you will be wasting money if it goes off in the fridge before you can eat it. Rather buy less or arrange with friends or neighbours to share your bulk purchases so everyone saves. Even better, if you have a garden, make it your mission to grow as much of your own food as you can.
2. Processed food and takeaways
You may not have time to cook every evening, but you will save a lot if you can set aside one day a week to cook and create your own "ready meals" and put them in the freezer, instead of buying packaged dinners or fast food. In addition, you should try to entertain at home whenever possible instead of dining out.
3. Insurance premiums
You should review these annually and get quotes from your current insurer and from competing companies. Values and circumstances change, and you may qualify for certain discounts based on your age or various risk factors. Just make sure you always make like-for-like comparisons when it comes to excesses payable and services offered, as well as the monthly premiums.
4. Service charges
Go through your bank statements and check what you're being charged for deposits, ATM withdrawals, online banking, notifications, debit orders and account management fees. These may seem like small amounts, but they can add up to hundreds of rands a year that you could save by changing how - or where - you bank.
Similarly, you should regularly review the management fees on any investment accounts you have, and check your cell phone, city council and other bills for any unexplained charges.
5. Entertainment Subscriptions
Subscription services are becoming increasingly popular, with things like Showmax, iTunes, audio books, wine and even razor deliveries being so easy to sign up for, but many of us forget to cancel these subscriptions when we don't use the services anymore. These may seem like small amounts too, but R100 a month for a service you don't use is R1 200 a year that you could be saving.
6. Gym or sports club membership fees
If you joined with good intentions but just couldn't stick to your exercise, tennis or golf routine, it may be time to stop kidding yourself and cancel your membership. If you're still keen to get fit, take up running or even walking whenever your schedule permits, or pay a one-time fee for a workout app on your phone.
7. Energy vampires
Experts say the power invisibly consumed by various electronic devices in your home - even when you are not there - can account for as much as 15% of your household electricity usage and cost you hundreds of wasted rands a year.
The worst of these energy vampires are appliances with "off" buttons that don't actually ever go off but stay on "standby" and keep using electricity. They include TVs, sound systems and garage door or gate openers with remote controls, as well as devices with continuous digital displays like DStv decoders and microwaves, and chargers for cell phones and other electronic equipment.
The simplest solution is to unplug these or turn them off at the wall when they are not in use. And if you're away from home all day, you can make further savings by turning off your geyser until you get home in the evening.
Author: Property24
