News & Updates

HOW INTEREST RATES IMPACT THE PROPERTY MARKET

Jul 26, 2019

News of the recent 25 basis points cut in the interest rate by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) was met with relief by consumers, and hailed as good news for the property industry. With further cuts to the interest rate rumoured to follow when the MPC meets again later this year, could this be the beginning of the recovery of the residential property market? 

If you’re in the market to purchase property in South Africa, chances are you already understand how interest rates affect how much you’ll end up paying. However, you might not realise just how far-reaching the effects of an interest rate rise or fall can be.

Property values fluctuate with interest rates

When interest rates are low, it generally encourages prospective home buyers to enter the market. Since obtaining home finance is more affordable, those who may have been on the fence about purchasing a property are more likely to take up a home loan and buy real estate.

In turn, this increase in demand for property may lead to a rise in property values as stock is snapped up and homes become more difficult to obtain.

Of course, the inverse will also apply: when interest rates are high, consumers may be more unwilling to take up the mortgage finance they need in order to enter the property market. With fewer people looking to buy, the value of real estate may stagnate or decline.

Interest rates play a major role in property cycles, and for this reason it’s important for potential home buyers to keep an eye on where interest rates are and where they may be heading. 

While trying to predict which way interest rates will move is far from an exact science, there are strategies consumers can use.

In general, stronger economies tend to push interest rates upwards, with lower rates used as a way to increase investment and eliminate a financial slowdown. In this way, staying informed of general economic news and trends can help you determine whether interest rates are likely to rise or fall.

However, it’s important to remember that interest rates are not the only factor that helps to determine the cost and difficulty of purchasing real estate.

Everything from location to population trends can also impact home prices and availability.

So, in summary:

  • Home loans with a lower interest rate may see a trend of potential buyers increasing.
  • With a lower interest rate, the prices for property on the market may increase, providing a positive environment for those wishing to sell their homes.
  • A lower interest rate generally results in more South Africans spending money, placing it back into circulation within the economy.