How inflation and interest rates affect home owners and sellers

Inflation and interest rates are ravishing the South African economy. The rapid increase in these rates is spurred by international factors like the Russia-Ukraine conflict and, closer to home, load shedding, a weaker Rand - fueling petrol price increases - and the uncertainty of strike action isn't making things better. These factors naturally affect the South African property market because they affect how much money the average buyer or seller has at their disposal and whether they're willing to part with their cash.

The Effect of Inflation on Homeowners 

Homeowners are least affected by inflation because owning property is considered the best hedge against inflation. That doesn't mean homeowners are off the hook. 

Buying Power

Essentially, a homeowner's inflation protection is tied up in assets, meaning a homeowner's buying power will be as affected as any other consumer. As daily expenses - food, petrol, electricity - rise, your Rands won't go as far as they would have. This has an impact on your lifestyle and your home. Home repairs and maintenance will inevitably cost more because products cost more and so does labour. This means putting off much-needed repairs that can affect your market value if you decide to sell. 

Cheap Credit Lines

As inflation ravishes the economy, being able to access cheap credit - think closer to 6% than 30% - can help you pursue projects and make purchases without much long-term effect on your cash. Although you will repay the credit with interest, since the inflation rate is at 7.8% (in September 2022) and expected to climb, having cheap credit is essentially like having cash.

Effect of Inflation on Homebuyers

Much like homeowners, as a buyer, inflation affects your buying power. However, unlike homeowners, this buying power can also affect your ability to purchase a property.

Acquiring a Bond 

During times of economic pressure, banks tend to be more cautious with their lending. Your spending will be scrutinized, as will your income's ability to withstand future financial pressure. In such instances, while you're unlikely to be declined for a bond, the amount you qualify for would decrease substantially.

Saving for a Down Payment

With the value of the Rand decreasing steadily, saving for a deposit becomes both challenging and fruitless. In a year a R200,000 deposit could net you less home than that same figure would now. Most money market accounts earn below 7% interest, well below the rate of inflation - which is climbing to 10%. That three percentage point deficit seems insignificant but is noticeable when dealing with six or seven figures.

The Effect of Interest Rates on Homeowners

Homeowners are most affected by interest rates as they determine affordability. Most homeowners won't be affected by a R750 jump in their bond repayment when they own a R1,500,000 home. But that pressure, coupled with inflation and economic uncertainty, means that R750 is compounded. You're paying R750 more for your bond, R400 more in fuel, R800 more in electricity, and so on, making the interest rate increase seem steeper. 

Paying Higher Bond Repayments 

Currently, the prime lending rate is 9.75%. A sharp increase from the 9% it had been for most of the year. Now most homeowners with seven-figure properties have had their repayments increase by upwards of R500. The prime lending rate is guaranteed to increase as Lesetja Kganyago promised the Reserve Bank would be increasing the Repo Rate to curb inflationary pressures.

Finding Buyers for a Property

When interest rates rise, so does the cost of borrowing, reducing the number of buyers on the market. A mere one percentage point increase in lending rates can make buying unattainable for dozens of prospective buyers. Without that competition, the next issue arises.

Achieving Above-Market Offers

The Cape Town property market is known for its return on investment because of the city's unrivalled beauty and commitment to ratepayers. But, getting a good ROI or selling above asking requires one thing: a large pool of buyers. When buyers think others on the market could snap up your home, they're more likely to act. When there are fewer buyers, there is a reduction in offers and even fewer above-market offers.

Interest Rate Effect on Homebuyers

Interest rates can affect buyers who don't own property. In such instances, it will affect affordability - how much you can afford to pay back at current lending rates, with enough buffer to afford future increases.

The Kind of Home You Can Buy

The prime lending rate in South Africa could reach 12% by the middle of next year, which would impact how much house you can afford. Most buyers will have to consider whether they can afford their current - and future - lending rates when buying a home. How much can they stretch their income or reduce expenses to survive another 75 basis point increase? Most often, the answer will be to buy cheaper, to give yourself room to breathe should there be any shock announcements from the Reserve Bank.

Conclusion: Navigating South Africa's Inflation and Interest Rate

It's not all doom and gloom. You can still buy and sell property in these conditions, but it's crucial - when navigating these conditions - to keep your objectives in mind. You need to be an active buyer or seller, meaning you should be pursuing your goal until it is achieved. This begins by being realistic and ends with being persistent. Talk to your real estate agent. Since being in the property market is our profession, our insights can be invaluable when navigating home buying or selling in the kind of economic climate we find ourselves.