Residential Property Market Remains Resilient

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Despite the increasing interest rate, residential property market remains resilient

The further increase of 75bps in the repo rate announced by the Monetary Policy Committee last week is disappointing for aspirant homeowners requiring credit and existing homeowners with mortgages. All of whom are already having to issue with the economic impact of severe load shedding, high fuel and rising costs of food.

Although this is the sixth consecutive hike in the repo rate (taking it to 6.25%), as the Reserve Bank of South Africa attempts to bolster the weakening rand and dampen inflation expectations, this still remains below pre-Covid repo rate levels of 6.5%, while the prime interest rate now stands at 9.75%.

Consumers in general are feeling the strain on household income. The Reserve Bank has highlighted that the key challenges facing the local economy are not the current level of interest rates and the cost of borrowing, but the ongoing infrastructure bottlenecks such as electricity, transport and education.

The deputy governor of Reserve Bank’s, Rashad Cassin, recently suggested that the bank is preparing to move towards a more ‘neutral’ interest rate setting.

The MPCs recent decision was ultimately guided by the inflation outlook and its assessment of the risks of wage inflation emerging. Local Higher interest rates will help to protect the currency rates, when combined with rising price pressures, they will temper domestic spending at a time when our economy is already struggling to grow.

Containing inflation

Inflation eased to 7.6% last month from a 13-year high of 7.8% in July. The Reserve Bank’s role is to contain inflation by bringing inflation and inflation expectations back to the 4.5% inflation target mid-point(within the target range of 3-6%) as a precondition for sustainable economic growth.

The MPC is particularly concerned about anchoring inflation expectations to avoid external price shocks. Food and energy prices have become entrenched and filtering through to price setting in the broader economy.

Ending the current tightening cycle

Once it is clear that price pressures are subsiding again, it will be possible for the bank to shift gear to a slower pace of interest rate hikes. The Reserve Bank has hiked rates by 275 bps since November 2021, and it is hoped that we may only see two further smaller rate increases, bringing the prime rate to 10.5% and an end to the current tightening cycle.

Despite the rising trend in interest rates since late-2021, activity in the housing market has remained resilient thus far, with recent data from Lightstone showing that while unit sales during the first half of 2022 were below those recorded during the same period last year, the value of those sales was higher.

Looking at the regions, the semigration trend saw the Western Cape record a higher number of sales during the first half of this year compared to the previous four years.

Author: Louwrens Viljoen (Property Practitioner at Property in Moot)

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