There is no doubt that just before this latest announcement we were already seeing a significant up tick in distressed sales of individuals and companies that are unable to keep up with their financial obligations”. Whilst bad debt is not at alarming levels, the current foreclosure rates have not been seen in the economy for several years; explains Levitt “One simply needs to look at the legal notices in the newspapers around the country to see sale in execution notices which we haven’t witnessed since the late 1990’s”.

When asked whether this signalled the final death knell for the residential property market boom, Levitt explains: “This interest rate hike is certainly not good news for homeowners struggling to keep up with increased bond repayments, but one cannot be too dramatic in predicting the end of the property market. It’s more like a tyre with a slow puncture, every time there is another hike the tyre deflates a little more and that is perhaps exactly the intention of the Monetary Policy Committee”.

“One must remember that the historic low interest rate cycle is what caused the market to boom in the first place. Any fall in interest rate increases asset values with real estate appreciating sharply. A hike in rates, has the opposite effect”.

Levitt believes that certain sectors of the residential property market will be worse affected than others with the latest rate hike will cause sectors warranting real concern. Others sectors of the market are not interest rate sensitive and have shrugged off all the other six rate hikes. “The upper-end residential property market seems impervious to interest rate movements and transactions above the R10million mark have not slowed down:  this market is dependant on wealthy locals and currency rich foreigners who are not mortgaging themselves to the hilt to get into the market: they are largely cash buyers.” Levitt believes that is why the estate agents who operate in Sandhurst, Clifton and Zimabli continually record and report record high value deals.

At the other end of the spectrum, low value homes below R1million also seem to be not that badly affected by interest rate increases because the financial variances on another 50 basis points is not dramatically significant and this is the entrant market for most new homeowners who budget accordingly . “But it’s the R2million to R5million pricing market where we are already seeing fallout and this latest hike will hit this market and hit it hard.” Levitt believes that holiday homes, golf course developments, certain fractional ownerships and development properties bought on a speculative basis is where there is already a price squeeze with large increases in defaults. Several banks have been upscaling their credit control and loss departments to keep up with an anticipated slew of foreclosures in these sectors of the residential property market and according to Levitt, the run has already begun.

Alliance Group which are the country’s largest auctioneers and valuers, historically sold large numbers of repossessed property from its inception in the 1990’s. Over the last few years Alliance, like all other auctioneers, reduced its forced sale component to single digit percentages and replaced it with a focus on commercial property sales, a market which has experienced its biggest historical price boom in decades. “The obvious question is how aggressively will interest rates hikes affect the burgeoning commercial property market?

“The answer is that commercial property values are yield-based and when interest rates go up, values go down”. According to Levitt, the commercial property market banks have traditionally financed borrowers at a 70% - 80% loan to value ratio. “So unless tenants tank, which they shouldn’t, there is still large equity in most commercial property deals. One must remember that this is a market which has seen a huge upward pressure on prices and rentals”.

”Certain banks were aggressively competing and buying market share in the commercial property market and have done deals which have surprised experienced commercial property stalwarts who could not find value in these deals,” says Levitt.

“It’s the business owner who bought his own property and overpaid, who may be feeling the pressure on high value financing deals, explains Levitt. “ Risky lending may be too strong a word but the old adage that in good times poor decisions are made, may come back to haunt certain banks who recently have been pushing commercial property transactions through on very marginal deals”.

Levitt explains that there can be no argument that with seven interest rate hikes commercial property values will cool off. “ Despite economic fundamentals still being in place in the South African economy we will see a couple of inexperienced commercial property investors who will become forced sellers and a couple of them going to the wall”. In the US, when the housing sector seemed jittery and the sub prime crisis emerged, the US Federal Reserve cut interest rates to avert a systematic recession in the economy. “Our Reserve Bank seems to be going the other way and rising interest rates into a jittery property market. This action may well slow down the inflation rate, but will cause major financial stress to many borrowers and their opportunistic financiers.”