The South African Reserve Bank’s decision to hike the benchmark repurchase (repo) rate by 50 basis points – off the back of a worsening inflation outlook – means that as of Friday it stands at 6.75%, or 1% above where it was less than 12 months ago.
This in turn means that banks’ prime lending rate, which is the rate they give to their most creditworthy customers, has risen from 9.75% to 10.25% per annum. “Lending rates have risen by a cumulative 175 basis points since the start of 2014 and the outlook is for interest rates to rise further during the course of 2016 in an attempt to curb inflationary pressures,” said Jacques du Toit, a property analyst at Absa Home Loans.
On a R500 000 bond, a 50 basis point increase to the prime lending rate means an increase in repayments of R165 per month, according to Jawitz Properties CEO Herschel Jawitz. “This may not appear to be particularly significant at first glance, but when added to the previous rate hike it begins to add up. Even though demand may be slow, the [property] market will remain well balanced between sellers and buyers presenting opportunities for both parties to achieve fair deals,” he maintains.
While the residential market has continued to outperform a slow economy, weak consumer confidence driven by stock shortages and good demand, there was a slowing in the rate of growth of house prices in 2015.
It is likely that house prices, in real terms off the back of the latest rate increase, may decline in 2016. Neil Roets, CEO of one of the largest debt management companies in South Africa, Debt Rescue, said the announcement comes on top of proposed 8% increases in electricity rates and will have a devastating impact on consumers, especially those with heavy debt loads.
During the announcement, Reserve Bank Governor, Lesetja Kganyago, indicated the bank is in a “hiking cycle” but than any further hikes to the repo rate would be highly “data dependent”. The Reserve Bank expects inflation to average 6.8% in 2016 and 7% in 2017. Rand weakness indicates that petrol prices may rise by 7c a litre next month, Kganyago said, while electricity prices could also increase.
How the interest rate hike will affect your pocket
- Bond: R500 000
- 9.75% interest rate = R4 743 monthly bond repayment
- 10.25% = R4 908 per month
- Bond: R800 000
- 9.75% interest rate = R7 588 monthly bond repayment
- 10.25% = R7 853
- Bond: R1.5 million
- 9.75% interest rate = R14 228 monthly bond repayment
- 10% = R14 975