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We are now firmly on the upward slope of the interest rate cycle

We are now firmly on the upward slope of the interest rate cycle

Author: Andreas Wassenaar
Date: 2022-02-23

An economic snapshot of the key and most important indicators reveal that our current CPI inflation is at 5,7% and the Producer Price Index (PPI inflation) at 10.8%. When PPI exceeds CPI, the upward pressure on our CPI inflation becomes predictable, which is why economic commentators are predicting a 1 % or 100 basis point increase in our interest rates this year.


Our key Repo rate set by the South African Reserve Bank is currently 4% (increased by 0,25% on 28th January) and our prime bank rate is at 7,5%. We are now firmly on the upward slope of the interest rate cycle. For the majority of us, this prime rate is most important as it determines the cost of our consumer debt and for those in the property market your mortgage debt repayments.


For every R1m in mortgage debt, your monthly repayment amount at 7,5% is R8,056 p.m. An interest rate increase to 8,5% pushes this repayment to R8,678 p.m. - this increase of 7,72% or R622 p.m. allocated to debt in your budget will not sound huge to most of us but on a macroeconomic level removes a large amount from other discretionary spending channels. As the cost of money increases general spending in the economy decreases and this impacts overall economic activity.


Since the peak in April 2021 at 5, 1 % the FNB House Price Index has started to decline and is currently recorded at 3,6% showing a moderation of property demand over this period.

Different market segments have experienced different responses over the past two years with FNB reporting that the affordable market experienced the most pronounced decline in 2020 due to the harsher impact of the pandemic on lower-income households.


The middle-priced segments of the property market are supported by relatively low-interest rates, the availability of credit and changes in housing needs. The higher-priced segments have a different set of drivers that fuel demand.


Value for money pricing that has emerged as price declines took hold to encourage people in this segment to take advantage of the great value presented and push the button on buying decisions. Interestingly the growth in the value of mortgage extensions (a significant 6,3% in 2021) reflects a shift to the financing of higher-priced properties.


The high end of the market is less sensitive to interest rate changes and as our prime rate increases, it takes some time for this to filter through to less demand at the higher end. For many people at the high end of the property market, a sale or purchase is driven by the relative perceived value by the buyer or the use of the money in an alternate opportunity by the seller and not by the need to have to live somewhere or use the money to purchase the next property.


This discretionary aspect of the high end of the real estate market means that it can become buoyant while other segments are contracting and can also retreat while the lower brackets are booming.
World GDP growth across all the main developed economies are showing incredible growth rates with the world's largest economy (by far), the US, growing by 5,5% year-on-year, ahead of China (4%) and the EU area (4,6%). Believe it or not, the UK is showing 6,5% growth, France 5,4% and India 8,4%. SA is at a pedestrian 2,9%.