Housing market strong amid Ukraine conflict

Russia’s invasion of Ukraine will impact inflation, the cost of fuel and other commodities. It will also influence the housing market 

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SA’s housing property market has shown remarkable resilience in the past two years, emerging stronger from the pandemic and remaining robust in the midst of civil unrest and inflationary pressures, says Carl Coetzee, CEO of BetterBond. “We expect it to do the same in the face of the ongoing Russia-Ukraine conflict.” This is not to say, however, that a protracted conflict will not have an impact on the housing market. 

HIGHER INTEREST RATE

“Rising oil prices as a result of the tensions in Eastern Europe may well have a knock-on effect on inflation in SA, leading to escalating interest rates. The South African Reserve Bank has forecast nominal 25 basis-point interest rate hikes for the next three years, but these increments may increase as inflation rises.” Bloomberg reports a strong chance of a 50 basis-point increase – the largest since January 2016 – when the Monetary Policy Committee meets on March 24. This will take the prime lending rate to 8%.

“However, the solid fundamentals already in place will buffer against these pressures. More than a year of record low interest rates have strengthened the property market so that it is able to withstand these geopolitical shocks,” says Coetzee. BetterBond is still reporting upward trends in the volume of bond applications for the 12 months to end February. “The number of application approvals increased by 9.2% over this period, while the number of formal grants increased by 14.2% – higher than the growth of 13.3% recorded for the previous year.” 

ACTIVE UPPER-END

As FNB reports, much of the current buyer activity is at the upper end of the market, where homebuyers are less sensitive to interest rate increases. “So while increased interest rates may subdue market volumes, there will still be pockets of positive growth. Bonds granted for homes of more than R3m currently account for 7% of all BetterBond’s formal grants, an increase of 44% over the past 12 months. There has also been an almost 26% increase in formal grants for homes of between R2.5m and R3m,” says Coetzee.

Rising interest rates have not dampened property prices across the board and BetterBond reports that the average home purchase price is up 11% in the past 12 months (January data) to R1,37m. The average purchase price was R1.2m for the 12 months ending January 2021. Despite not being as active as in 2021, shortly after lockdown restrictions eased and interest rates hit a record low of 7%, the average purchase price for first-time homebuyers has also increased by 11% to R1.15m. First-time homebuyers were paying on average just over R1m for their homes in 2021.

STILL A SOLID INVESTMENT

“It is worth remembering that property has established itself as a resilient and safe asset class, especially during turbulent times. This could lead to investors seeking to shore up their portfolios by focusing on property. The interest rates are still accommodative enough to make this a sound financial decision,” says Coetzee. Furthermore, while there’s no denying that the cost of living is rising – with electricity tariff hikes and fuel price increases on the horizon – rising inflation does have a related effect on the value of your home.

“If interest rates are relatively low, as they are now, this means that the value of your home is increasing at pace with inflation, without you having to pay that much more into your bond each month,” says Coetzee. Should the interest rate go up to 8% later this month, it will mean an increase of R617 a month on a R2m bond, taking the monthly payment from R16,112 to R16,729. “While this is admittedly an added expense at a time when household costs are rising, there is peace of mind in knowing that property is still a good asset investment during uncertain times,” says Coetzee.

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