May interest rate hike to have different impacts on South Africa’s property market segments

The latest rate increase is likely to affect the property market segments in different ways. First-time buyers, in particular, may face growing affordability pressures and this could delay entering the market while they wait for more favourable lending conditions, believes Bradd Bendall, National Head of Sales at BetterBond. However, he adds that opportunities still exist for aspirant buyers to enter the market through new developments or properties priced below the R1.21 million transfer duty threshold. “For existing homeowners, the increase in the prime lending rate will place added pressure on monthly budgets, particularly as fuel and household costs continue to rise. However, those who have planned carefully and maintained financial discipline are generally in a stronger position than they were during the higher-rate environment experienced through much of 2024.” On Thursday, May 28, Lesetja Kganyago, Governor of the South African Reserve Bank (SARB) said the Monetary Policy Committee (MPC) decided to increase the policy rate by 25 basis points, to 7%, effective from 29 May. He said four members preferred this action, while two favoured no change. The bond originator says the decision to increase the prime lending rate to 10.50% reflects the mounting pressure created by ongoing geopolitical tensions in the Middle East, rising fuel costs and persistent inflationary risks. Statistics South Africa has also recently announced that annual consumer inflation rose to 4.0% in April from 3.1% in March. “While today’s increase in the prime lending rate will place additional strain on consumers already grappling with higher living costs, it also signals a cautious approach aimed at protecting longer-term economic stability.” Despite the higher interest rate environment, BetterBond says the housing market has continued to show resilience. “We have seen steady growth in bond applications, with a year-on-year increase of 6.2%, while home prices for both first-time and repeat buyers have reached record highs, marking the strongest growth seen since the recovery from the 2020 pandemic.” In a climate shaped by global uncertainty, fuel price volatility and cautious lending practices, the rate increase may help contain inflationary pressures and support longer-term confidence in the economy, says Bendall. "While higher borrowing costs may soften some housing activity, the demand for property remains resilient, particularly in high-demand regions and among financially prepared buyers," he says. In addition, the MPC’s decision to increase the repo rate by 0.25% may send some ripples through the property market, impacting on investors in the upper-end of the residential market as well as the commercial and industrial spaces which can be more complex, says Greg Dart from the High Street Auction Company. He says funding mechanisms for those utilising the High Street auction platform do not necessarily hinge on loans from mainstream financial institutions and this slight fluctuation in the interest rate could spark many to actively investigate alternative solutions. “Many would have already factored in elements that are beyond both their and the Reserve bank’s control - including oil price fluctuations due to the Iran war, the impact this has on local inflation and the performance of both emerging markets and their currencies.” SARB's defensive stance sends a positive message to local and international investors The auction company says the Reserve Bank’s largely defensive stance during 2026 sends a positive message to both local and international investors and helps buoy the beginning of a recovery in business confidence which is sorely needed. It says savvy investors often recognise that higher interest rates present an opportunity to secure properties at lower prices, especially if they benefit from a distressed sale or from entities with larger portfolios either offloading non-core assets or diversifying their investments in response to short term fluctuations in economic performance. “Investors who can afford higher borrowing costs can also negotiate better deals or find properties in desirable locations that were previously unattainable." "In addition, an interest rate increase plays into the hands of investors who are purchasing commercial spaces for conversion either into residential or student accommodation. High bank borrowing costs might well keep would-be first-time home buyers in the rental market for longer, ensuring a steady income stream.” According to Dart, it is unlikely that a small step back in interest rate cuts will halt the slow but welcome recovery in the commercial property space whilst pressure on global supply chains is likely to encourage local manufacturing which could become more competitive, increasing demand for industrial properties. Focus on inflation expectations and long-term price stability The rate hike was broadly expected and reflects the SARB’s continued focus on inflation expectations and long-term price stability, says Justin Davidson, the Portfolio Manager at Anchor. He says that importantly, the tone remained measured rather than materially more hawkish, although July remains an important meeting, with the possibility of another rate increase still on the table. “Higher rates continue to place pressure on affordability and consumer spending, particularly against the backdrop of elevated living and municipal costs. For the property sector, the focus remains on operational efficiency, tenant retention, balance sheet discipline and careful capital allocation.” Despite the near-term pressure from rates, the listed property sector still appears to be in a more constructive position than it was 12 to 18 months ago, the portfolio manager says. “We are seeing improving sentiment, renewed capital markets activity and stronger balance sheets across parts of the sector,” Davidson says.