There's Still Good News for Property in South Africa - Despite Interest Rate Pain

South Africa's property market is still seeing large amounts of activity, despite high interest rates.

Since 2021, the South African Reserve Bank has hiked rates ten times, with the current prime lending rate standing at 11.75%.

Richard Gray, CEO of Harcourts South Africa, told BusinessTech that the interest rates have had a significant impact on both property sales and rentals.

"Whilst the original increases had a minimal impact, we have seen the increases from the middle of 2022 and 2023 really shift the market. On the sales side, the market has moved from a sellers market to a buyers market in general." Gray said.

"Prior to the rates hikes, properties were selling very fast, and the competition amongst buyers meant that the prices being fetched were generally close to the asking price."

"With the interest rates going up, the number of buyers has decreased, leading to less demand for properties. This, in turn, has meant that sellers are not getting the prices that they hoped for their homes and are often having to wait for longer to sell them."

He added that the most obvious effect of the new interest rates on buyers is affordability, with buyers no longer able to qualify for the same level of finance.

Many were forced to exit the market because they could no longer afford what they were looking for, with many either staying in their existing homes or continuing to rent.

Despite the high interest rates, he said that it is dangerous to compare the property market in 2020 and 2021, which had a "once in a lifetime" low interest rate shift.

"This is almost an unfair comparison, and it is better to compare the market to 2019, which shows a very different picture."

"At Harcourts, for example, our sales for the first six months of 2023 are still more than 25% higher than those of the same period in 2019. So, although the residential property market has slowed down compared to 2021, it is still a strong market with plenty of transactions happening."

Rental growth
He added that the group has seen a strong recovery in its rentals since interest rates started to ascend.

He suggested that the demand for rental properties has grown, with many unable buyers becoming tenants due to financial constraints.

"In the low-interest rate cycle, people who were renting took advantage of the 'cheap' money and bought, but that has reversed now."

"Due to this increase in demand for rental properties, we have also seen annual price escalations return to normal levels."

Western Cape thriving
Although all areas in the country have been hit by the increase in interest rates, the Western Cape has been impacted less than others

He said that this is probably because demand for property in the Western Cape is far higher than the rest of the country.

He said that semigration is driving this demand, even if it has slowed.

"People are enticed by strong local government and municipalities and are prepared to pay a premium or downgrade their home."

More won't help
He added that it is unlikely that South African consumers will be able to handle any other interest rate hike, with South Africans also dealing with high electricity prices, high inflation and major municipal rate increases.

He said that homeowners will struggle to make mortgage payments if rates are increased, and the number of defaults will increase.

Moreover, landlords will also have to deal with additional financial costs, which will put further pressure on their tenants.

Businesses will also have to cope with the higher financing costs and will have to pass this cost on to the consumer.

"I believe that the higher-than-ideal inflation rate is being caused by factors beyond the control of the consumer."

"Things like the petrol price, electricity price and the weak exchange rate are causing inflation. Increasing interest rates is simply going to hurt the consumer and the property market, and have very little impact on inflation."