As Jacques du Toit, Property Analyst at Absa noted, "Interest rates remain one of the main factors influencing the performance of residential property prices. The view shared by most economists that rates would remain unchanged this year and possibly into next year as well, proved to be incorrect when the SA Reserve Bank increased the repo rate by 50 basis points last month." As he further stated, "The interest rate hike tells consumers that the trend forward is gradually upwards, which will have the effect of making investors even more cautious."
"Property investors need to be aware at all times of the possibility of further interest rate increases and to adjust their requirements to a price range they can definitely afford" said Riaan van Deventer, Head of Real Estate at Engel & Völkers Southern Africa. He also stressed the importance of using a reputable real estate company with experienced sales advisors, who would assist both first-time buyers and property portfolio investors to make a sound investment when purchasing property.
"If you buy the right property in a popular suburb, you will always get a good return on your investment, and our highly trained property sales advisors who have access to the leading property valuation software platforms available in South Africa, can confidently advise you of trends and areas considered the better investments, whether short-term, long-term or buy-to-let."
Interest rates have been declining over the past few years, and this lulled everyone into a false security of expected monthly bond repayments. Now with an upward trend in interest rates, many home owners are in a quandary whether to fix their home mortgage interest rates with their banking institution or not, and in doing so avoid higher rates over the next few years. There is unfortunately no easy answer; in fact it is a gamble with risks - disaster or success.
Radio talk show host Bruce Whitfield on his 567 Cape Talk/702 Talk Radio Money Show, discussed this matter with Warren Ingram of Galileo Capital. Those property owners paying the maximum on their bonds already may feel secure knowing that if they set their rates now, at least they will be able to accurately budget for the amount they will be paying for the next few years. On the flip side, if a home owner decides not to fix their interest rate and the repo rate increases yet again, the only way for them to survive may be to sell their property. So in a case such as this, it will be a good decision in principle to fix your rates sooner rather than later. 'Err on the side of caution'. However when you have fixed rates, and they do come down, you are committed to pay the higher rate for the set period.
If you analyse the nett effect of a fixed rate, it only really benefits you if interest rates were to increase by more than 2% or 3% over the next few years. Imagine having fixed your rate, and the Reserve Bank announces a 0.5 or 1% drop. Quite a disconcerting thought.
As Whitfield commented, "The only way you score by fixing your interest rate is if there is an interest rate shock which goes up by three times more than you anticipate. Probably unlikely." Craig Hutchison, CEO of Engel & Völkers Southern Africa concurred with this, considering the current economic crisis.
If you decide to discuss this decision with your bank, always remember that banks will price it to suit themselves and so their advice is clearly for their own profit. Banks will not put themselves in a difficult position and will obviously make a decision to benefit themselves.
According to du Toit, "The SA residential housing market once again showed its resilience despite tough economic conditions by reflecting steady growth in terms of market activity, transaction volumes, price growth and the demand for mortgage finance during 2013." He expects continued steady growth for 2014 in terms of market activity and prices, although inflationary pressure will keep real price growth to a minimum.
The various segments of the residential property market were all impacted by the performance of the economy and the state of consumer finances during the course of 2013.
Du Toit concluded, "Based on property market conditions such as demand and supply and price trends, I still believe it is an opportune time to buy property for primary use as well as investment purposes." This optimistic sentiment was also sanctioned by Hutchison: "We have seen exciting sales performances at our franchises across South Africa this year so far, which is a clear indication of the buoyancy in the market. However, we do caution prospective buyers not to over-extend themselves to the point that they will not be able to service their debt."
This confident viewpoint was also shared by John Loos of FNB Home Loans, "By the final quarter of 2013, a year-on-year growth rate of 7.9% was recorded, which implies modest price growth in real terms, given CPI inflation at nearer to 6% at the time. This fourth quarter price growth represented a mild "re-acceleration" since earlier in the year, the National Credit Regulator had suggested that mortgage lenders had been becoming more accommodating, and the general mood in the residential market was good."
