The Monetary Policy Committee is scheduled to meet on the 23rd of November to make their next interest rate announcement. Many economists predict a rate hike of 25 basis points, taking the Prime Lending Rate to 12%, owing largely to the rand’s persistent devaluation and the continuous pressure on inflation.
Since November 2021, the MPC has increased the interest rate ten consecutive times. In May, the MPC raised the key repurchase rate by a staggering 50 basis points, marking the highest level since May 2009 – at 8.25% and a cumulative increase of 475 basis points. However, the July and September meetings saw a halting in the hawkish hiking cycle with the repo rate left unchanged – despite a sharp rise in headline consumer inflation in September and a notable strengthening in upside risks to inflation.
Other economists interpret the modest increase in inflation as an indication that, although the headline rate is anticipated to remain higher than the MPC’s midpoint target range at approximately 5% in the months ahead, the five-member committee may maintain their pause following the decrease in inflation expectations during Q2.
According to FNB’s September Property Barometer, predictions suggest that interest rates have hit their highest point, paving the way for a discernible cutting cycle expected in the latter part of 2024. However, the near-term outlook for this projection maintains an upside risk bias, with the potential for an additional rate hike looming if the US Federal Reserve continues to raise rates or if inflation exceeds the central bank’s target range.
With each increase in interest rates, the property market is placed under increased pressure. Currently, numerous homeowners are grappling with the challenge of meeting their home loan repayments. Similarly, a declining number of buyers find themselves able to manage the escalating costs of home finance. This, in turn, diminishes the potential buyer pool and dampens the demand for property.
Considering the unlikelihood of an interest rate cut at Thursday’s meeting, the optimal scenario for the upcoming session would be if the MPC opts to maintain interest rates at their current level. This decision would provide the market with additional time to address the challenges posed by existing debts and the prospect of increased repayments.
The escalating burden of debt and inflation has constrained demand in the global housing market. As affordability has deteriorated, buying activity has declined to pre-pandemic levels, with indicators suggesting a widespread downscaling.
On a national level, emigration, semigration, and downsizing remain significant contributors to the consistent and growing availability of properties for sale in the market. In contrast, findings from FNB's Market Strength Index point to a declining pattern in demand levels, fuelling buying activity in the lower-priced brackets. This is primarily influenced by more stringent lending criteria, increased borrowing costs, and affordability constraints.
Despite the initial surge of first-time buyers into the market facilitated by historically low interest rates following the pandemic, these same market entrants, particularly those in the younger demographic, now contend with the challenges posed by increasing interest rates, sluggish income growth, and elevated unemployment rates – further constraining demand.
This trend is underscored by data from FNB’s latest Estate Agents Survey, which indicates a significant increase in the number of properties now taking three months or longer to sell - 67% of listed properties in Q3, up from 56% in Q2.
The prolonged selling times reported in the Estate Agents Survey can have significant implications for both buyers and sellers. Extended periods on the market may lead to increased financial implications for sellers and necessitate strategic (and sometimes desperate) pricing and marketing efforts to attract potential buyers. In contrast, a market where properties take longer to sell could provide buyers with more negotiating leverage, enabling them to explore a wider range of properties, take their time in decision-making, and potentially secure better deals at lower property prices, driving mortgage amounts down.
Home loan volumes currently trail below levels observed before the COVID-19 pandemic. Notably, the average bond amount, extrapolated from deeds data, experienced a decline of around 3% in Q2—the first such decrease in 14 years, dating back to the 2nd quarter of 2009. This indicates a shift in the average amount borrowed for home loans. With the cost of borrowing so high, potential homebuyers may borrow less or reconsider the size of the mortgage that are willing to take on. Likewise, economic uncertainty impacts consumer confidence and individuals may opt for smaller mortgages to mitigate financial risks and ensure they can comfortably meet their repayment obligations. On the other hand, stricter lending criteria imposed by financial institutions and sluggish income growth limit aspirant homeowners in the amount they can borrow, and may result in borrowers qualifying for much smaller mortgage amounts.
Given the anticipated persistence of higher interest rates in the coming quarters, it becomes essential for consumers, homeowners, and potential buyers to make prudent financial decisions in order to effectively navigate the evolving market dynamics.
