Buying a home in an economy that is constantly shifting requires careful consideration and research. The greatest question to ask may very well be, “Will I be able to afford this investment no matter what happens next?” Unfortunately, this question may not have enjoyed the prevalence it deserved over the past few months. As the South African Reserve Bank (SARB) announced that it was increasing the repo rate to 4% in January 2022, this question once again started regaining some of its vitality.
The question that is now on many homeowners’ and tenants’ minds is “How does the repo rate affect me?”
Rising repo rate
SARB lowered the repo rate to historically low levels in 2020 to inject much-needed revenue into the economy after the months-long dry season, hoping to stimulate economic growth. With a lower repo rate, banks were able to lower interest rates as well, incentivising consumers and investors to once again borrow and spend.
The danger of this is that the influx of spending that floods the economy can lead to price hikes and increased inflation if left unchecked. In December 2021, the inflation rate was already at 5.9%, in stark contrast to the conservative 3%-6% SARB aims to maintain. In order to counter this, the repo rate has since seen a steady increase in an effort to once again normalise spending, and in turn, create a true image of the country’s economic wellbeing. Analysts have indicated that up to three additional repo rate increases could be seen throughout 2022 to lower the inflation rate to 4.5%.
Real estate effects
Due to the lowered repo rate, banks were able to drastically lower their own interest rates, creating a buyer’s market that allowed many first-time homeowners to enter the market much sooner than they normally would have been able to. However, with the repo rate increase, interest rates are also seeing a steady rise, leading in turn to increases in monthly bond repayments.
Homeowners who had entered the market before the pandemic began and were fortunate enough to enjoy a slight reprieve in their bond repayments each month are now simply going back to “normal”. They were prepared for the amounts they will now once again be paying each month. The same may not be true for those who were only able to afford a home due to the lowered rates.
The greatest impact
The greatest danger ahead lies with those who were only just able to afford the investment even with the lowered rates. As the repo rate, interest rates, and ultimately instalment amounts increase, they may soon find that homeownership is no longer as affordable as it was a year ago.
To offer support to the tenants whose incomes were affected by the lockdown, many landlords also chose to waive rental increases in order to help their tenants retain financial security. However, once a landlord’s bond repayment increases, the rent increases as well. For most tenants, this will mean the end of their rental increase holiday.
Informed investments
Those who are aiming to enter the market, whether they are considering letting, renting or buying, must keep in mind the fact that the market is rapidly normalising again and that many of the benefits that are still present at the moment may not be there for long.
The rise in the repo rate and the resultant increase in interest rates and bond repayments may seem like a change for the worse for those who will need to reassess their budgets in the months ahead. But we need to remind ourselves that the change is aimed at creating a more stable economy in the long term.
Fortunately, CMM Attorneys is here to help you assess how your property investment and real estate plans could be affected in the months to come. So get in touch with us to get the peace of mind you deserve.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)