Effect of a Higher Interest Rate on the Property Market

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By Seeff Eswatini

In a weak economic climate, interest rate hikes can have a significant impact on the property market.

The higher interest rate drives up the cost of borrowing which puts pressure on existing home owners with housing loans and potential buyers. It usually reduces the number of buyers in the market and decreases the demand for property in the market which means lower sales volumes.

Lower demand not only reduces the number of property sales which takes place but can also lead to higher stock levels. Higher stock levels are caused on th

e one hand by properties taking longer to sell, meaning more stock remains on the market.

On the other hand, rising financial pressure on home owners could lead to more homes put up for sale, thus further increasing the for sale stock. This in turn puts pressure on asking and selling prices.

Impact on property buyers

The immediate impact is usually on the cost of debt affecting consumers including homeowners with housing loans, but also prospective buyers who require finance. It then becomes more difficult for prospective buyers to qualify for home loans, and usually the deposits required by the banks will increase so as to reduce the bank risk.

Higher interest rates also drive up the cost of living which further impacts the ability of people to purchase property and in some instances may even drive people into default situations. Buyers will need to budget for higher repayments and a bigger deposit. That said, price growth usually flattens and buyers who are able to get into the market can benefit from flat prices and the ability to negotiate a better price.

Impact on property sellers

Properties will take longer to sell. Fewer buyers in the market mean that buyers will be in a stronger negotiating position. That will put asking prices under pressure. For serious sellers, it would likely mean that they will need to drop their price to conclude a sale, especially if the property is overpriced.

While some sellers may be tempted to rather hold out for a better offer, the risk of this lies in that it may not be forthcoming within the immediate time frame. Sellers who would be looking to buy another property should therefore also consider the time value of money. If they hold out for too long, they too may have to pay a higher price.

Impact on the rental market

A higher interest rate usually means fewer people can purchase their own homes and they will therefore have no alternative but to turn to the rental market.

This will create a higher demand for rental accommodation and lead to lower vacancy rates. That said, while there will be higher demand, rental rates will usually come under pressure, thus driving down rental inflation and impacting the rental yields earned by rental investors.

Impact on commercial property

A higher interest rate and a weaker business environment will now doubt impact the commercial property market. Vacancy rates tend to go up as the demand for commercial (across the spectrum of office, retail, and industrial).

Lower demand in the economy as a result of household budgets under pressure will no doubt dampen business and industrial expansion which will impact the demand for commercial property.

Commercial property prices could stagnate or may even go into decline depending on the nature of the economic challenges. Rental rates and yields earned are also usually impacted.

Impact on developments

A higher interest rate will also slow down new developments given that demand for property purchases will be under pressure. Planned developments already in the pipeline may need to be put on hold.

If sales do continue amidst lower-than-expected demand and the developers feel the need, they may consider repricing some of the units to at least conclude some sales.

Either way, the stalling of new developments could negatively affect housing markets.

This will be especially felt in areas which are seeing an influx of people such as urban areas where there will be growing demand for housing. The challenge of then only being able to develop at a later stage is that the prices of the units will inevitably be higher.

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