Rising inflation and the potential impact on interest rates and property

After enjoying a nearly five-decade low interest rate for close to two years, we have now seen a fifth successive interest rate hike - this time up by a somewhat unexpected 0.75% which has taken the prime interest rate to 9%.

The Reserve Bank has for some time now signalled the need to normalise the interest rate with incremental increases to return it to the pre-pandemic level which would be reflective of the current economic climate. That said, a considerable rise in inflation, fuel and food prices has now added pressure to this hiking cycle, hence the higher than expected rate hike.

By now you are possibly aware that inflation has increased to 7.4%, the worst since the last Global Financial Crisis back in 2009. It is also well above the Reserve Bank's target range of 3% to 6% for inflation. Further pressure on the interest rate is brought to bear by the weakening of the currency.

What impact might the higher interest rate have on the residential property market?

Despite the rising interest rate, the first half of 2022 was another good phase for the residential market. While it is too early to tell what impact the higher interest rate may have during the second half of the year, it is expected that the market will remain resilient, provided there are no unexpected interest rate or economic shocks.

That said, it would follow that higher inflation, rising costs and a higher interest rate will affect consumer wallets and their disposable income. This may well start impacting demand in the lower price bands where consumers face tighter budgets.

A positive for the market is that the prime rate at 9% is still below the pre-pandemic level of 10%. Bank lending conditions should also still favour the market. FNB's recently released Property Barometer indicate that while the market has remained resilient in view of the rate hikes, risks are creeping in as noted above.

One notable trend has followed, has been a decline in house price growth, potentially attributable to slightly slower demand and pressure on buyers. FNB has reported that the average house price growth for the second quarter this year stands at around 3.7%, well below the average inflation of 6.6%.

An important consequence is that asking prices are likely to see more pressure as the year progresses. That said, the Southern Suburbs property market has performed really well during the first half of 2022, and we expect it to remain resilient. As a safeguard, we recommend that you work with an experienced local area agent who can provide the best advice and marketing for the current market conditions.

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