How interest and inflation affect sellers
The interest rate is set by the Reserve Bank’s Monetary Policy Committee which meets every second month.
While many factors influence the demand for property and prices, two key economic indicators, namely the interest rate and inflation, have a profound impact on the property market not just for those with a home loan, but also buyers and sellers.
ALSO READ: Teaching environmentally-friendly financial decisions
Property buyers and sellers should therefore always keep an eye on these.
Samuel Seeff, chairman of the Seeff Property Group said the interest rate has had the biggest impact on the property market over the last 30 months to the benefit of both buyers and sellers.
It is precisely because of the 30% cut in the interest rate by the Reserve Bank to assist consumers during the height of the Covid-19 pandemic that the property market surged to record high sales activity.
While there was always an expectation that the interest rate would be normalised back to the pre-pandemic level once the economy recovers, we have now seen a hastening of this due to a spike in inflation.
Why does inflation impact the interest rate?
In simple terms, inflation is the rate at which the prices of goods and services increase in the economy.
Aside from aspects such as basic foods, this would include the price of petrol as well as Eskom electricity and so on.
The interest rate is set by the Reserve Bank’s Monetary Policy Committee which meets every second month.
ALSO READ: Familiarise yourself with the interest rates and know how they affect you
In the event of a crisis in the economy, the Bank could, however, step in at any time to adjust the interest rate.
The Bank uses two key indicators to determine the interest rate.
The first is the inflation rate which aims to keep between 3% to 6%.
The second is the performance of the Rand against major international currencies such as the US Dollar, Euro and Pound Sterling.
The inflation rate averaged 4.6% for 2021 but increased rapidly this year due to various reasons, mostly external to the SA economy such as the oil price, imported food prices and the Russian War in Ukraine.
Inflation spiked to 7.8% in July and declined slightly to 7.6% for August 2022.
ALSO READ: Interest rate predictions
The spike in inflation pushed the Reserve Bank to accelerate the rate hikes and they responded with a 75 basis point hike in July and again in September.
Chances are that another hike will come following the Bank’s November meeting.
Impact of higher interest rates on the property market and sellers.
Higher interest rates have an affordability effect on buyers in that the cost of home loan finance increases.
This means that home loan repayments will increase for existing homeowners as well as new buyers.
It also impacts sellers because lower demand and fewer buyers mean that asking prices will be under pressure.
Sellers will therefore need to be more careful in terms of how they price their property.
Also follow us on:
