Keep an eye on bigger picture, owners urged as pressure mounts

BY BONNY FOURIE bronwyn.fourie@inl.co.za

A spike in inflation and the subsequent repo rate hikes have made it difficult for cash-strapped consumers to afford their bond repayments

SIGNIFICANT percentage of homeowners are being forced to sell their homes due to money struggles – and not only those who own properties at the affordable end of the market but also those at the upper end.

In the first three months of 2022, an estimated 20% of homeowners were selling in order to downscale as a result of financial problems.

Fast forward to the third quarter of this year – July to September – and 19% of homeowners are selling because of the pressure, states the latest FNB Property Barometer; 30% of them own properties valued at less than R750 000, and 11% own properties valued at more than R3.6 million.

This reason for selling remains the second-most common, the first being downscaling due to life stage.

“Sales due to financial pressure are still elevated at an estimated 19% of the market,” says FNB economist Siphamandla Mkhwanazi.

“However, despite the sharp rise in borrowing costs, these sales remain in line with the 18% long-term average (since Q4 ‘07). By price segments, the survey shows rising pressure in the affordable market, with an estimated 30% of sales likely due to financial pressure.”

The past two repo rate hikes of 0.75% have left many homeowners questioning if they should sell.

Carl Coetzee, the chief executive of BetterBond, says it’s “probably realistic” to expect a period where we will see lower transaction volumes and dipping house prices. “We also anticipate a bit of segmentation in the market, between the lower end which is dependent upon housing finance, and the upper end where housing equity and wealth play a greater role.”

While it is difficult to predict what the Monetary Policy Committee will decide at its next meeting in November and January, he says some economists have forecast a 0.5% repo rate rise at each of these, and then holding steady after that.

“Sound fiscal policy dictates that interest rates must fluctuate to mitigate inflationary pressures – they can’t remain at the recordlow levels we saw during the pandemic.”

Many factors influence the demand for property and prices, but Samuel Seeff, the chairperson of the Seeff Property Group, says the interest rate and inflation have a “profound impact” on the property market, not just for those with a home loan, but also buyers and sellers. The interest rate has had the biggest impact on the property market over the past 30 months to the benefit of both buyers and sellers.

“It is precisely because of the 30% cut in the interest rate by the Reserve Bank to assist consumers during the height of the Covid-19 pandemic that the property market surged to record-high sales activity.

“While there was always an expectation that the interest rate would be normalised back to the pre-pandemic level once the economy recovers, we have now seen a hastening of this due to a spike in inflation.” He explains that inflation is the rate at which the prices of goods and services increase in the economy. Aside from aspects such as basic foods, this would include the price of petrol as well as Eskom electricity and so on.

“The South African Reserve Bank uses two key indicators to determine the interest rate. The first is the inflation rate, which it aims to keep between 3% and 6%, and the second is the performance of the rand against major international currencies such as the US dollar, euro and pound sterling.

The inflation rate averaged at 4.6% for 2021, but increased rapidly this year for various reasons, mostly external to the South African economy such as the oil price, imported food prices and the Russian War in Ukraine. Inflation spiked to 7.8% in July and declined slightly to 7.6% in August 2022.”

The spike in inflation, Seeff says, pushed the Reserve Bank to accelerate the rate hikes, and it responded with a 75 basis point hike in July and again in September. And chances are that another hike will come after the Reserve Bank’s November meeting.

“Higher interest rates have an affordability effect on buyers in that the cost of home loan finance increases. This means that the home loan repayments will increase for homeowners as well as new buyers.

“It also impacts sellers because lower demand and fewer buyers means that asking prices will be under pressure. Sellers will therefore need to be more careful in terms of how they price their properties.”

Does this mean that homeowners should sell their homes and rent instead, as interest rates climb?

“No,” says Coetzee.

“Buying a home is more than just a financial investment. Having a home of your own provides financial security and affords you the freedom to choose your own lifestyle. It’s also more rewarding to know that the amount you are paying each month for your home is going towards your own bond, and not someone else’s.”

He adds that the property market has proven to be a resilient asset class, especially during challenging economic times.

“Many expected the market to collapse during the pandemic, but the opposite happened. The record-low interest rates of 2020 helped bolster the property market so that it could withstand financial headwinds.

“The increase in first-time buyer activity during that time was a boon for the residential property market. Much of the buyer activity is now at the middle to upper end of the market, where buyers are less affected by interest rate changes.”

In addition, South Africans can take solace in the fact that the country’s monetary policy is in line with major economies globally, with the European Central Bank, US Federal Reserve, and Bank of England all having raised interest rates by this percentage.

“We are not alone. And we know we must keep inflation in hand, so it is worth having one eye on the bigger picture.

“South Africa responded pre-emptively to global inflationary pressures by starting its interest rate hike in November last year. So we are closer than others to reaching the end of this tightening cycle.”

ALMOST 20% of sellers can no longer afford to keep their homes.

PICTURE: KINDEL MEDIA/PEXELS