How will rising interest rates affect the home buying market?

Rhys Dyer, Ooba Group CEO

“Increasing buyer education and understanding the purpose of why interest rate hikes are being implemented can be a helpful tool for potential buyers to address,” he says.

Why interest rate hikes will be implemented

The purpose of interest rate hikes is to curb inflation, i.e. the increase in the prices of goods and services. The South African Reserve Bank (SARB) prefers to implement rate hikes to ‘cool down’ the economy when inflation is high domestically, as is currently the case.

“To put this in context, the Sarb has an inflation target range of between 3 and 6%, and we are above that in South Africa at 7.6% inflation,” explains Dyer.

“High inflation increases the cost of living for consumers and interest rate increases are intended to reduce demand and spending, again reducing inflation. Unfortunately, high inflation slows growth in the economy and it is important to correct the balance.”

When interest rates are high, the cost of paying off a loan becomes more expensive, so consumers are less likely to take on more debt. This reduces demand for goods and services, which causes prices to fall. Unfortunately, this has an impact on the financial sector, particularly the mortgage market.

Looking at the big picture

Some buyers and first-time home buyers have taken a ‘wait and see’ approach due to concerns over affordability and down payments.

“This is a natural reaction, but it is important to put these price increases in context. In the year The home buying frenzy in 2020 and 2021 is the result of low interest rates introduced by Serbia to stimulate the economy during the global pandemic. The latest round of interest rate hikes have returned the prime rate to pre-Covid levels and should not be a cause for panic, Dyer says.

“Revised interest rates are below the long-term average of the past 25-years.”

He believes consumers should look beyond the current interest rate cycle and note a number of ‘big picture’ factors that suggest it is still a good time to invest in property. These include the bank’s competitiveness and attractiveness of loan approvals, the fact that we are entering a buyer’s market and that property prices remain affordable in many parts of the country.

Buying vs Renting: Which is Better in the Long Run?

Dyer acknowledges that some consumers may consider these factors and still choose to rent rather than buy. “Buying a home is a decades-long commitment and in these difficult times, some may prefer the flexibility of renting or simply find themselves at a stage in life where renting makes more sense than buying.”

“However, the answer to the question of whether it is cheaper to rent than to buy a home in the wake of rising interest rates is not necessarily simple. Landlords tend to increase their rents after significant hikes to cover their own increased costs.

Here, he reinforces the importance of thinking long-term and choosing to pay your own mortgage over someone else’s. “Renting may be more affordable on a monthly basis, but over a decade (or more) you could end up spending the same amount on rent as you would on a mortgage. In contrast, property values ​​will only appreciate over time.”

The importance of buying a home loan

The most effective tool prospective homebuyers have to minimize the negative impact of rising interest rates is to budget accordingly and cut unnecessary expenses in order to cover the additional monthly payment costs.

The second is to use a bond originator before they start their home buying journey, says Dyer.

“The banks are still actively competing for home loan work and using a bond originator for multiple banks on your behalf is more likely to get you a better deal than if you applied to just one,” he explains.

“A bond issuer can also help negotiate better rates and terms on your behalf when necessary. Our research shows that homebuyers who get multiple quotes pay an average of 1.03% (103 basis points) less on their mortgage than those who get one quote. This will help to reduce the price challenges caused by the proportional increase,” he concluded.