Interest rates uncertainty dampens house sales

University Estate is a mainly residential suburb of Cape Town located at the foot of Devil's Peak to the east of the city. Picture: Tracey Adams/African News Agency (ANA)

University Estate is a mainly residential suburb of Cape Town located at the foot of Devil's Peak to the east of the city. Picture: Tracey Adams/African News Agency (ANA)

Published Jan 21, 2024


Cape Town - House buying will remain muted this year as uncertainty over interest rates remains. While commercial property brokers are optimistic about the outlook for the year, office rentals remain unchanged in negative territory.

Adrian Goslett, regional director and CEO of RE/MAX, Southern Africa, said an interest rate hike would mean trouble for the property market as a whole.

“Most transactions rely on home finance. When interest rates are as high as they are, fewer and fewer individuals are able to afford the higher debt repayments. We have already noticed this last year, with the industry languishing at a 25-30% drop in sales,” he said.

FNB’s House Price Index showed a marginal uptick in the last three months of 2023 which signals that price growth may have reached its trough.

“That said, we expect the weak house price growth trajectory to continue for a little while, amid heightened uncertainty,” said Siphamandla Mkhwanazi, senior economist at FNB.

“In addition to the potential impact of the election cycle and a possibility of further fiscal slippage on currency stability, the heightened geopolitical tensions, biosecurity risks as well as adverse weather patterns complicate the deceleration trend in inflation and could prolong the lift in inflation expectations away from target.

“This could cause interest rates to remain high for longer than we currently anticipate and extend prevailing market weakness.”

Siphamandla Mkhwanazi, senior economist at FNB

Goslett said on the upside, most economists seemed to predict that interest rates would hold steady at the January meeting of the Monetary Policy Committee of the South African Reserve Bank and might even drop within the first quarter of the year.

“The best thing that could happen for the property market is for interest rates to start coming down again.

“This will relieve the financial pressure that most homeowners are experiencing and will allow aspiring buyers greater opportunity to afford to purchase property,” Goslett said.

Until such time, Goslett’s advice to homeowners is to try to keep their debt levels as low as possible, especially on the debts with higher interest rates, such as personal loans or car loans.

“Funnel whatever spare cash you have towards paying off those debts first and avoid taking on any new debts if possible,” he said.

Mkhwanazi said market activity ticked up marginally to a rating of 5.3 in the fourth quarter of 2023 from 5.1 (out of 10) in the third quarter of 2023.

He said the estate agents activity rating trend suggested that home buying activity levelled out between 2Q23 and 3Q23.

“This trend is reflected in the house price growth trajectory. Nevertheless, the activity rating remains below the long-term average of 5.9 (since the inception of the survey in 2004), and considerably (28.2%) lower than the most recent peak of 7.1 recorded in 4Q20.”

However Mkhwanazi said that forward-looking indicators suggested the increase in activity might be shortlived.

“Estate agent’s short-term (three months ahead) expectations somewhat back-pedalled, with only 31% of respondents (estate agents) expecting activity to increase in first quarter of 2024, down from 50% in third quarter of 2023,” Mkhwanazi said.

“The relative despondency mainly emanates from agents focusing on the affordable market. While part of this is due to seasonality, concerns around affordability, the cost of living, and lack of job security were cited as main drivers for the relative pessimism.

“Indeed, 53% of surveyed agents stated that income levels are ‘far behind’ house prices, compared to 43% previously, and just 30% in fourth quarter 2022 at the start of interest rate tightening cycle.

“In addition, the normalising semi-gration trend may also have influenced agents’ outlook on the Western Cape market, weighing on overall market expectations.”

On the commercial property side, John Loos, property strategist at FNB Commercial Property Finance, said property brokers perceived a strengthening in property sales activity in all three major commercial property markets.

In a survey of commercial property brokers, 44% said they were satisfied with business conditions, which was 2% higher than the previous quarter, while 56% perceived business conditions as unsatisfactory.

“The brokers remain most optimistic about the Industrial and Warehouse Property Market, and perceptions in this market have strengthened slightly from quarter to quarter,” Loos said.

“The Retail Property Activity Rating rose significantly from 4.02 in the prior quarter to 4.90 in the fourth quarter of 2023.”

The Office Property Market Activity Rating remained unchanged from quarter to quarter at 4.29 after the prior quarter’s increase.

“This property class has the weakest reading of the three markets,” Loos said