Property market feels squeeze of rates spiral
Seven interest rate hikes since June last year have ratcheted up the pressure on homeowners and new entrants to the commercial property sector, with indications that many are feeling the pinch and are being forced to sell.
This is expected to be compounded by the latest interest rate hike by the Reserve Bank.
The Alliance Group, one of the biggest auction houses in SA, said on Friday that its legal division had experienced a 60% increase in foreclosure sales over the past three months compared with the same period last year.
Alliance Group CEO Rael Levitt said the foreclosure sales had largely been residential and that the Reserve Banks decision to hike interest rates by 50 basis points last week would further increase liquidations, insolvencies, sales in execution and forced sales.
What weve noticed is that even before this latest hike, foreclosures and sales in execution were at their highest point in the past three years, Levitt said.
He said there was no doubt the latest hike was going to make life difficult for homeowners and that certain segments of the market would be hurt worse than others.
I believe the R2m-R5m value market will be hit.
He said the higher interest rates would also affect the commercial property market, especially new entrant buyers.
It was unlikely that large, listed property companies and funds would be caught unawares by the interest rate hike as they would have forward cover for interest rate variations.
But he said there had been a lot of opportunistic buying over the past year by new entrants to the market. I ts those buyers who may find the seventh consecutive interest rate hike too heavy to bear.
The Alliance Group said it was not expecting a collapse of either the residential or commercial property markets but before this interest rate hike there were already jitters in the market and increased foreclosures by banks, and that is going to worsen, said Levitt.
First National Bank property strategist John Loos said it was to be expected that there would be an increase in foreclosure sales. That is what rising interest rate cycles always do. I dont think one should be alarmed by the rate of increase in bad debt or foreclosure sales. I dont think it will be abnormally bad, said Loos.
He said it was important to remember that in recent years the bad debt situation had been abnormally good. So the bad debt levels are coming off a very low base.
Loos said the previous interest rate hiking cycle in 2002 was an abnormally good one because a lot of borrowing ratios had dropped dramatically after the 1998 interest rate shock, which saw the prime interest rate going up to 25,5%.
We had a massive drop in the ratios of household debt to disposable income (after the 1998 interest rate shock).
Thats why we found that in 2002, the residential property market hardly skipped a beat despite interest rate hikes of 400 basis points that year, he said.
But since 2002, indebtedness levels had risen quite substantially so that the negative effect of the 350 basis point hikes that the market had experienced since June last year were significantly worse for property than the rising rates in 2002.
But to put it in perspective, I think we are in a significantly better situation than during the previous rate hiking cycles before 2002, Loos said.
Gavin Opperman, managing executive of Absa home loans, said household debt was now at 76,6% of income, but that household expenditure had started to be curtailed.
Oppermans main concern was for future first-time homeowners.
Entry into the property market will become increasingly difficult, what with escalating building costs, rising interest rates and slowing economic growth, he said.
Opperman said property remained a good investment and a safe place to put your money but said consumers who experienced a debt squeeze should get in contact with their banks as soon as possible.
Property economist Francois Viruly, of Viruly Consulting, said he thought the fundamentals in the office property market were strong enough to overcome the latest rates hike.
Im less concerned about the commercial property market because fundamentals are strong and vacancies are at 10-year lows.
As far as the residential sector is concerned, I think this rise in interest rates could force people to slightly down-trade their properties.
People who were thinking of buying property for R1m could in these conditions move down towards R800000, said Viruly.
If one starts seeing problems it could well be like the buy-to-let market, where many buy-to-let owners may find rentals are insufficient to meet financing costs.
In that market we could well see an increase in distressed sales, he said.
Article by: Nick Wilson, Business Day