Why interest rates are hitting the SA property market so hard

There is a reason why all property market stakeholders are battling in the current interest rate cycle. Picture: Kindel Media

There is a reason why all property market stakeholders are battling in the current interest rate cycle. Picture: Kindel Media

Published Oct 26, 2023


Rapidly rising interest rates and living costs have had a marked effect on South Africa’s property market, with sales volumes and price growth slowing in recent months.

Even though the interest rates aren’t that much higher than in 2019, the market is more sluggish than usual, and several industries are struggling as the total monthly bond registrations have almost halved since the 2021 peak.

Clive Bredenkamp, IT executive at proptech and fintech company e4, explains that, during the pandemic, interest rates were the lowest in many years, and this caused a mini-boom in property activity; so although rates are now only, on average, 1.5 percent higher than in 2019, the reaction of the market has been more drastic because of the aggressive low seen in 2020.

This has a far-reaching effect on several industry players.

“When interest rates rise, banks become more cautious with loans because they know clients tend to get in more financial trouble during such an uptick. This, in turn, affects everyone in the property value chain. Sellers, estate agents, and mortgage originators struggle in a stagnant market. Conveyancers, transfer attorneys, and bond attorneys are also affected.”

He also notes that banks, on average, have panels of about 600 to 800 bond attorneys, and the higher the transaction volumes, the more they can spread those transactions across large and small law firms. Smaller firms who may get a few transactions per month, rely on that income to grow their businesses and to pay employees; without it, they shrink.

While transfer attorneys get business from estate agents and developers rather than banks, they have a similar problem of lack of supply. In fact, it affects the entire economy.

“Property is a massive industry. Developers and construction companies are all affected. Companies that do gas, electrical, fencing, and entomology compliance certificates are affected. And the government doesn’t receive as much income from transfer duties,” Bredenkamp states.

The good news, however, is that the property market is cyclical.

“We’ve been tracking interest rates and bond volumes for more than 20 years at e4, and the stats show a clear correlation between interest rates and property transactions. As interest rates rise, there’s a downturn in property transactions and as they come down, there’s an uptick in property sales – with around a three-to-six-month lag in between.”

Therefore, until the rate drops, banks are looking at creative ways to invigorate the market.

“Even though banks are more cautious with granting loans now, they still have targets to meet, and when consumers don’t buy properties, their mortgage portfolios suffer. So they become motivated to grant more loans because there are fewer applications.”

He says banks usually change their loan-to-value ratios during these times and start looking for bigger deposits, amongst other strategies.

Also on the positive side, Bredenkamp nonetheless expects an upturn in the market in the second half of 2024.

“Unless something drastic happens, we expect to see interest rates start coming down again in the second half of 2024. And when they do, the market volumes should respond within three to six months towards the end of 2024. And with that, all the other affected industries will start to receive a much-needed recovery.”

For buyers, he says it’s helpful to remember that interest rates have been worse in the past, and a slowdown does tend to rationalise prices and calm the speculative growth in asking prices that have been seen since 2021.

IOL Business