While the housing market continues its recovery trajectory, an increasingly cautious approach to lending amid growing inflationary pressure linked to fuel price shocks and global uncertainty, could see the prime lending rate increase when the Monetary Policy Committee meets on 28 May.
“Although not ideal, enough has been done in recent months to instill investor confidence in the property market,” says Bradd Bendall, BetterBond’s National Head of Sales. Several economic indicators remain positive. The country’s cumulative trade surplus for the first quarter of the year increased to R77 billion, supported by strong precious metal exports. Closer to home, inflation has remained with the 3% inflation tolerance band.
“So while ongoing tensions have raised concerns about inflationary pressures, South Africa’s economic fundamentals are on firm footing, and the housing market is likely to withstand this prime lending rate increase.” The shift comes after two consecutive decisions to hold it steady at 10.25%. Despite there being no change since the last cut in November last year, home loan applications have continued to grow steadily, recording a year-on-year increase of 6.2%, says Bendall. “Home prices have also hit record levels for first-time buyers and repeat buyers.
According to the latest BetterBond Property Brief, the year-on-year house prices for both segments have recorded their strongest increases since the recovery from the 2020 pandemic, at 10.3% for new buyers and 19.9% for repeat buyers. In April, first-time buyer home prices averaged R1.4 million, while repeat buyers spent an average of R1.7 million.
“The impact of a potential interest rate increase at the upcoming Monetary Policy Committee meeting is likely to be felt differently across the market,” notes Bendall.
First-time buyers
There are already market shifts that will make it increasingly difficult for some aspirant buyers to enter the market should the prime lending rate increase in the next few months, cautions Bendall. The recent declining trend in deposit requirements has come to an abrupt halt, increasing by a surprising 33% quarter-on-quarter in April for all buyers.
“The turnaround has hit first-time buyers the hardest, as the required deposit amount for this segment has surged by 38%. This is a significant jump in a tight credit environment.” Affordability concerns could delay first-time buyers from entering the market. “Fortunately, there are several ways for aspirant buyers to invest in property. Buying in a development or below the R1.21 million transfer threshold can help reduce costs when buying a home.”
Existing homeowners
A rate increase would place additional pressure on homeowners grappling with rising household costs and fuel prices, notes Bendall. However, it is worth noting that if the repo rate increases 25 basis points to take the prime lending rate to 10.5%, it will still be below the 11.75% level seen during much of 2024, says Bendall. “This means on a R2 million bond, homeowners will still be paying just over R1 700 less each month than two years ago.”
New buyers may opt to adopt a more cautious approach to purchasing property if interest rates rise. However, by seeking pre-approval ahead of their bond application, they will be able to gain a clearer understanding of what they can afford within the current economic climate.
The rentvesters
With an increase in the prime lending rate, it’s possible that more younger buyers will reconsider rentvesting as a viable property investment strategy. This emerging trend allows buyers to rent in sought-after areas while purchasing a more affordable property in a high rental-yield suburb, enabling them to get a foot on the property ladder.
“Even if the prime lending rate goes up at the end of the month, it will still be below the 11.75% level seen two years ago,” says Bendall. “There is still an opportunity for rentvesters to build equity over time while maintaining flexibility in where they live.”
Buy-to-let investors
Across the property market, average home prices have hit record highs and home loan applications volumes remain healthy. This bodes well for the buy-to-let market, especially in high-demand areas such as student hubs and economic growth corridors. However, a rise in the prime lending rate does increase the risk that some investors may struggle to cover their bonds if tenants default on rent or if occupancy rates soften. Again, prudent planning and budgeting will ensure that buy-to-let investments add value to a property portfolio.
Empty-nesters
Mature homeowners over the age of 50 are likely to be the least affected by interest rate fluctuations. Many are close to paying off their bonds and have the financial resources to absorb price changes more comfortably. Similarly, older buyers can manage their finances effectively to manage payment increases.
According to BetterBond’s year-on-year data for April, buyers over 60 have seen average purchase prices rise by 8.05% year-on-year. “With affordability less of a concern for these buyers, a decision to increase the repo rate this month is unlikely to have a significant impact on their buying activity.”
Regional reactions
The growing demand for homes in Johannesburg’s South-Eastern suburbs is likely to remain resilient even if the prime lending rate increases, says Bendall. “Over the past 12 months, these suburbs have accounted for 23.3% of all home loans granted by BetterBond. The region has also recorded the highest growth, at 28.6%, possibly because of the comparative value for buyers – particularly first-time buyers entering the market.”
The Western Cape follows closely, accounting for 19.3% of the share of home loans granted. The province has maintained its position as the region with the highest average home loan value, at more than R1.8 million. It has also shown the largest increase over the past 12 months, with sustained demand driven largely by semigration, says Bendall. “This growth is likely to continue even if the prime lending rate increases at the end of the month.”
While a potential interest rate increase may dampen expectations of further relief for consumers, underlying demand in the housing market remains supported by steady bond application growth and regional resilience, says Bendall.
“Demand remains robust, particularly in sought-after regions and among repeat buyers,” he concludes. “In a climate shaped by geopolitical uncertainty, fuel price volatility and cautious lending practices, maintaining market stability and controlling inflation will be key to sustaining confidence in South Africa’s property sector.”
