Why the 2023 interest rate picture is different to 2019, when the property market can expect a reprieve

Clive Bredenkamp, e4's IT executive.

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The rapidly rising interest rates and living costs have had a marked effect on the property market, where sales volumes and price growth have slowed in recent months. Clive Bredenkamp, IT Executive at leading local proptech and fintech company, e4, says although the interest rates aren’t that much higher than in 2019, the market is more sluggish than usual, and several industries are struggling as the total monthly bond registrations have almost halved since the 2021 peak.

“During the pandemic, interest rates were the lowest we had seen in many years, which caused a mini-boom in property activity. What’s interesting is that even though the rates are now only on average 1.5% higher than in 2019, the reaction of the market has been more drastic because of the aggressive low we saw in 2020.”

This has a far-reaching effect on several industry players, he says. “When interest rates rise, banks become more cautious with loans because they know clients tend to get in more financial trouble during such an uptick. This, in turn, affects everyone in the property value chain. Sellers, estate agents and mortgage originators struggle in a stagnant market. Conveyancers, transfer attorneys and bond attorneys are also affected.”

He explains: “Banks, on average, have panels of about 600-800 bond attorneys. The higher the transaction volumes, the more they can spread those transactions across large and small law firms. Smaller firms that might get a few transactions per month, rely on that income to grow their firm and to pay employees. Without it, they shrink. Transfer attorneys, though they get transactions from estate agents and developers rather than banks, have a similar problem of lack of supply.”

In fact, it affects the entire economy. “Property is a massive industry. Developers and construction companies are all affected. Companies that do gas, electrical, fencing and entomology compliance certificates are affected. And the government doesn’t receive as much income from transfer duties,” says Bredenkamp.

The good news is that the property market is cyclical. “We’ve been tracking interest rates and bond volumes for over 20 years at e4, and the stats show a clear correlation between interest rates and property transactions. As interest rates rise, there’s a downturn in property transactions and as they come down, there’s an uptick in property sales – with around a three-to-six-month lag in between.”

Until the rates get lower again, banks are looking at creative ways to invigorate the market, he says. “Even though banks are more cautious with granting loans now, they still have targets to meet, and when consumers don’t buy properties, their mortgage portfolios suffer. So, they become motivated to grant more loans because there are fewer applications. They usually change their loan-to-value ratios during these times and start looking for bigger deposits, among other strategies.”

Bredenkamp and other experts expect an upturn in the market in the second half of 2024. “Unless something drastic happens, we expect to see interest rates start coming down again in the second half of 2024. And when they do, the market volumes should respond within three to six months towards the end of 2024. And with that, all the other affected industries will start to receive a much-needed recovery. For buyers it’s helpful to remember that interest rates have been worse in the past, and a slow-down does tend to rationalise prices and calm the speculative growth in asking price we have seen since 2021.”