What Goes Up, Must Come Down - Rate Hikes Now Could Mean Lower Bond Payments Next Year

While consumers are justifiably concerned about another interest rate hike this month, ahead of the festive season, the Reserve Bank's timeous response to inflation means we could see rates drop again towards the end of 2023, says Carl Coetzee, CEO of BetterBond.

"There's no denying that South Africans are feeling the pinch, and another repo rate hike this month will be our seventh consecutive increase. But, it's worth considering that the Reserve Bank responded quickly to signs of rising inflation by gradually increasing the repo rate from November 2021." This has enabled consumers to budget accordingly and prepare for the impact on their monthly bond repayments. "While a pain point now for consumers, the Reserve Bank's strong stance will actually spare further hardship later, as it should help to bring inflation closer to the midline target. Once inflation starts dropping, so too will the interest rate."

Reserve Bank Governor Lesetja Kganyago said recently that interest rate hikes have been necessary to control inflation and cautioned that further hikes would be considered to lower inflation. However, he told delegates at a lecture at Wits University that the "short-term pain" would help mitigate rising inflation. Economist Dawie Roodt has said this means that "in a year's time we could be talking about lower rates again". Coetzee adds: "We need to also bear in mind that South Africa's fiscal policy is sound, and despite global inflationary pressures - the IMF predicts that more than a third of the global economy will shrink in the next year - there are still opportunities for growth and investment."

Also, South Africa has one of the most advanced and stable banking sectors in the world, says Coetzee. As a February 2022 report by the Global Credit Rating agency on South African financial institutions notes: "We must recognise the critical role that the Reserve Bank played prior to, during, and post the pandemic, as an independent institution that prioritised system stability which allowed the sector to navigate an acute period of stress relatively unscathed. This gives comfort that it will take the necessary steps to keep inflation in check during this tricky period of uncertainty, while continuing to champion strong regulatory oversight of the sector."

Lightstone's October report is cautiously optimistic about market conditions, saying that while transfer volumes for 2022 are likely to be less than the 493 000 seen before the property market crashed in 2008, they will still match the 2021 Covid-bounce back. At an estimated 330 000, these volumes are well above the levels seen in 2017 and 2018. Furthermore, although the interest rate increases have affected affordability, especially at the lower end of the market, buyer activity in the luxury residential housing segment is back to 12%, a number last seen in 2015. Lightstone also reports that price inflation for all property bands has outperformed CPI since 2020, despite national year-on-year house price inflation having decreased steadily in the past year.

The steady interest rate increase has not dampened banks' appetite to lend, says Coetzee. "In fact, banks are offering higher loan-to-value bonds to help consumers buy homes. BetterBond's October data shows that loans of 100% or more accounted for just over 57% of our application intake for this month." While the market will inevitably slow as affordability continues to be a challenge, there are still opportunities for buyers to invest in property, and for those who meet the criteria, an option to apply for loans of 100% plus. There has also been a 2.3% improvement in BetterBond's approval ratio over the past 12 months, despite rising interest rates.

"The next few months will be challenging for consumers, but there's light at the end of the tunnel when it comes to the residential property market. As soon as inflation starts levelling off, we should see interest rates drop as well," concludes Coetzee. "The market has proven its resilience during the pandemic when everyone expected prices to plummet, and we expect it to do the same over the next months as the economy starts to recover."