MAIN IMAGE: John Loos, Property Sector Strategist at FNB Commercial Property Finance, Carl Coetzee, CEO of BetterBond, Dr Andrew Golding, chief executive of the Pam Golding Property group, Samuel Seeff, chairperson of the Seeff Property Group, Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa.
Despite last week’s decision by the South African Reserve Bank (SARB) to increase the repo rate by 0.25 basis points, the real estate sector is still optimistic about the year ahead.
This increase follows an increase in November last year and will result in the prime lending rate increasing to 7.5%.
Role-players in the industry are, however, in agreement about the results of the rates hike on the market and are carefully optimistic about the sector.
John Loos, Property Sector Strategist at FNB Commercial Property Finance, says the fact that consumer price inflation became more troublesome over the course of 2021 as the global and domestic economies recovered, with CPI (Consumer Price Index) inflation accelerating from a lowly 2.9% year-on-year in February to 5.9% by December took the inflation rate to very near the upper limit of the SARB’s 3-6% CPI Inflation target range, requiring some policy action.
He summarised the expected implications for the property market as follows:
- Rising short term rates add additional upward pressure to Government long bond yields too, along with ongoing high rates of government borrowing and an expected rising global interest rate cycle also pressuring long bond yields. Rising long bond yields are in turn expected to exert upward pressure on key property capitalization (Cap) rates. We would expect the multi-year rising trend in Office and Retail Property Markets’ cap rates to continue in 2022 as a result. However, this may not be the case for the Industrial Property Market, whose declining vacancy rates of late point to strong income growth prospects, leading this sector to continue to buck the rising cap rate trend.
- Rising capitalization rates in Office and Retail Property are expected to sustain pressure on valuations, and this could see the Office Market, with its extremely high vacancy rate and declining rentals, remaining in declining valuations territory in the near term.
- The rising interest rate cycle is expected to lead to the pace of residential development peaking during 2022, slowing down late in the year.
- Rate hiking may provide some mild support for the Residential Rental Market. Typically, rising interest rates can see a portion of aspirant home buyers delaying their purchase., This can see the home buyer exodus from the rental market slowing mildly, which in turn can lead to lower vacancy rates and higher rental inflation.
- After some mild resurgence into positive year-on-year growth territory in the second half of 2021, this year could see growth in new commercial property mortgage lending tapering once more. Industrial property demand could continue to grow, buoyed by the area of logistics and a sector gearing up for greater levels of online retail. But the weaker Office and Retail Property Sectors could see a cooling off in sales activity in the near term as a result, constraining growth in new mortgage lending this year.
Carl Coetzee, CEO of BetterBond, says despite a slight increase in monthly bond repayments, the rise will not have a significant immediate impact on the housing market
“Homeowners can now expect to pay a nominal R152 extra on a bond of R1 million. Of course, this amount increases with the value of the bond, but the additional monthly payment is still well below what consumers were paying at the start of 2020 when the prime lending rate was at 10%.
Buyer activity remains positive despite the gradual upswing in interest rates which started in November last year. Deeds Office registrations increased by almost 11.5% for the six months ending in November, suggesting that buyers are still making the most of the favourable lending environment.
Dr Andrew Golding, chief executive of the Pam Golding Property group agrees that the rates hike was expected.
“We had hoped that there would be a pause in the upward cycle trend. However, with the December consumer inflation rate at close to the upper limit of the SARB’s inflation target and with local risks to the inflation outlook firmly on the upside – the MPC was likely to take this decision to increase rates now. Notwithstanding this, the interest rate will hopefully increase slowly and over an extended period.
“For aspirant, first-time home buyers seeking mortgages, the average rate of concession remained at -0.2% below prime in December, which is the lowest rate since mid-2010, as banks continue to compete for market share. Repeat buyers fared even better, with an average rate of concession of -0.4%. Additional indications of favourable lending conditions include the 5.5% increase in the size of mortgages in Q4 2021 compared to year-earlier levels and the 24% decline in deposits as a percentage of purchase price during the same period. During the final quarter of last year, deposits stabilised at 7.0% of the purchase price compared to 9.2% in Q4 2020.
“While 100% bond applications have stabilised, the approval rate continues to rise, reaching 83.7% in December, approaching the pre-Covid high of 85% in February 2020. In fact, the 83.8% approval rate for 100% loans extended to first-time buyers in December now exceeds the pre-Covid high of 83.1% recorded in February 2020,” Golding stated.
He said although the Pam Golding Residential Property Index shows national house price inflation slowing from a peak of 5.45% in May 2021 to 4.39% by year-end, the 2021 average of 5.1% was the strongest recorded since 2015 (5.9%).
Samuel Seeff, chairperson of the Seeff Property Group, says against the backdrop of rising inflation and a higher oil price, it is inevitable that the consumer will unfortunately have to absorb the higher costs even though the rising inflation is not because of higher consumption.
“Even with the hikes, the rate remains at the lowest levels in decades and will continue serving as an inducement to buyers. We expect the market to absorb the hike comfortably and for the momentum to continue.
“We expect another good year for the property market, and it remains particularly favourable for buyers. The momentum will continue creating opportunities for sellers, and aside from continued trade in the sub-R1.5 million price band, we anticipate strong activity in the R3 million to R8 million range.
“Despite the rate hiking cycle now in effect, it is still the best buyer’s market in decades, supported by bank lending which remains the best in over a decade with higher loan-to-value bonds available and first-time buyers still able to secure 100% bonds, often with a cost allowance on top of that.
“There has also been a steady flow of new stock and while there are stock shortages in some areas and price bands, the market remains well-balanced. Price growth has been kept flat, inflation-linked due to slow economic growth and rising inflation. Buyers can therefore still benefit from well-priced stock in the market.
“There has simply not been a better time to get into your own home in over ten years. It makes absolute financial sense if you have the means and commitment required to be a homeowner. That said, the rate hiking-cycle signals some caution for buyers and homeowners to be mindful that we are likely to see further hikes this year and they must build that into their home ownership plans,” he concluded.
Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, said he was hopeful that the interest rate hikes might occur more gradually over the course of the year.
“Every time interest rates climb, home loans become that little bit more expensive. This can affect activity within the housing market, as fewer people will be able to afford the repayments at the higher interest rate. Over time, this could mean smaller buyer pools and downward pressure on asking prices, especially if more homes enter the market owing to affordability issues,” he explains.
Goslett adds that the more gradually interest rates climb, the less of an effect it will have on the housing market.
“If interest rates had remained stable after the last interest rate hike in November, the MPC would have allowed homeowners and buyers time to adjust to the higher repayments that they faced on their home loans and other debt repayments. This second consecutive interest rate hike is likely to dampen demand among buyers and could also place many homeowners under pressure to keep up with their home loans,” Goslett comments.
Regarding the outlook for the rest of the year, Goslett remains cautiously optimistic for whatever lies ahead.
“The property market has experienced two years of hyperactivity despite the economic challenges we have faced. While it is likely that we will see activity subside this year along with any interest rate hikes, the South African real estate market is resilient and the demand for homes will always exist in some form. The key to generating good returns on your real estate investments is to stay informed of local market conditions by seeking the advice of a trusted real estate professional,” he concludes.
