 when we look at what drives higher interest rates that obviously as those of us who are within the housing market ultimately end up feeling the pinch. Yes, thanks for having me. So when we talk about the influence of high interest rates on the property markets of Africa, you've sort of nailed it. Thank you for that good evening and welcome to episode 451 of the Private Property Podcast. I'm your host Uzaman Dongwa, Kumailo. Now tonight's conversation is one that I'm very excited about, but for the wrong reasons. I think I get excited about it because we know that when you're operating in different fields, property in particular, there are different macroeconomic factors that come into play that you always need to be mindful of and certainly always need to get a grasp of because they have an impact on your home ownership journey or even on your home acquisition journey. And we saw that happen, of course, last week when the Reserve Bank Governor increased the repo rate by 25 basis points. And we saw that now interest rates have increased in South Africa, meaning that you're paying more for your, you know, all the debt that you have effectively paying more for it in terms of the interest that it is charged. And we talk a lot about negotiating your interest rates and understanding, of course, that a lot of us are going to have a variable interest rate on our home loan. And so you always want to get a sense of, well, what exactly informs how our interest rates even come about, what are the factors that lead to this up to even increase the interest rates. So we're going to be looking at the impact of, you know, interest rates, the activity around it on the housing market in South Africa, how it impacts you as a buyer, as a seller. And of course, if you are in the rental market, and as a property investor, because I think the big thing is that property investors, this is an amount that eats into your bottom line. So if you're, you know, paying an extra 500 grand, for instance, on your home loan facility, it's eating into your bottom line. So it's a question of, did you adequately budget for it when you acquired your particular property, or you were literally budgeting on the tail end of things and counting on such variables not changing. I want to find out from you, certainly, what you feel about the increase in the interest rates, did you budget for it? I think the big thing is, did you budget for it? And if you're a new time buyer, where you bought in the past two years, we experienced the historically low interest rates, had you budgeted for the increases? I think that's quite the big one, because we want to make sure that when you bought at the lower end, you're ready for the increases that we know are inevitable, and we're already seeing them right now. So let us know in the comments section, and help us get a good sense of the impact of interest rates, and the different, you know, factor in geopolitical factors that happen, not just in South Africa, but in other parts of the world. I'm joined this evening by Masal Dutoy to the CEO at Lead Home Properties. Masal, good evening, and thank you so much for joining us on the show. Hi, good evening. Thank you for having me. It's such a pleasure to have you with us for the first time on the show, Masal. I think the big starting point that I want us to explore is the effect of the increasing interest rates, and obviously we know inflation is also on their eyes on the overall housing market in South Africa. You know, what are those factors that come into play when we look at, you know, what drives higher interest rates that obviously as those of us who are within the housing market ultimately end up feeling the pinch? Yes, thanks for having me. So when we talk about the influence of high interest rates on the property markets in South Africa, you've sort of nailed it. It's very much to do with cost and how much can you afford as a consumer. And obviously with interest rates goes up, the cost of borrowing goes up, which as you said eats into your bottom line. The interest rate hike of 25 best points that we saw announced this week was a third hike of 25 best points in a row since November, which meant we've gone up from 7% prime interest to 7.75% in a matter of three or four months. Now that in itself needs to also be seen in context. A 10% prime interest rate that we had prior to COVID-19 and prior to the cuts in order to simulate the economy. So there's still a 2.25% give in the interest rate of current interest rate versus prior interest rate. However, the reality is that the Reserve Bank has indicated quite strongly that we need to brace ourselves for what they call normalization of interest rates. And all my economics buddies keep telling me what that means we're going back to 10%. And so I think as consumers, when you talk about budgeting and you talk about how much can you spend on your mortgage, we really need to start thinking about what is that sustainable interest rate that you can afford your property on what should you budget for. And I strongly advise that as individuals, we look at some of between 9% and 10% prime given what the Reserve Bank has indicated. When we want to speak about the factors that influence interest rate clearly, the biggest single one is inflation. From a Reserve Bank perspective, there's only a couple of tools in the arsenal that they can use to counter inflationary pressures on the economy. And it also depends on whether inflation is perceived to be demand pool, which in the basic term means that people are earning more money and they're wanting to spend more money on goods. That's for instance, what we've seen in the US where the government underwrote $2,000 for each person in the country, they then went and spent it on Amazon that pushed up the prices on consumer goods. That's a demand also of inflation because it means the demand for goods have come up. That's a good inflationary pressure to add. And that is usually what you can manage quite easily with interest rates. What we're seeing in South Africa is cost push inflation. That means that it's not because of the inherent growth in the South African economy or inherent growth in wages and money in South Africa or supply of money in South Africa. It's because of things outside of our control that is pushing up our cost of living. And that, as we've discussed tonight, the war in Ukraine is having a huge impact on us. The reality is that oil prices have skyrocketed. When COVID hit, I think oil was down at $20 per barrel. It's now north of $100 per barrel. That's a significant increase. And so those costs eat into every aspect of our life, driving your kids to school, transport to get commodities from the mines to refineries, agriculture, getting goods traveling across the country. And unfortunately, that, those costs gets passed on to consumers, including at a 15% plus year plus 15% rate. So cost push is really the worst of all worlds in terms of inflation pressures. And the main way that governments and reserve banks can deal with that is to put up interest rates. And so that's sort of where we find ourselves today is the reserve bank indicating that increasing interest rates and getting back to normalised interest rate is their preferred method of countering this negative cost, cost push inflation. The offshoot of high interest rates obviously is a stronger currency. And we've seen that over the course of the last week or a week ago, the RAND was trading at $30 to the dollar. Today, the RAND is trading at $49.50. And that's because anytime interest rates goes up, international investors are willing to move money from one geographic area to the other because they're chasing yield, yield being high interest on the money they put in the country. So there's good as well, but they're significantly more bad in the short to medium to enforce the African consumers. This evening, I'm in conversation with Marcel D'Toy, who is a CEO at Lead Home Properties, looking at the impact of the interest rates and interest rate activity on the housing market in South Africa. Of course, there are different factors that have led to not only the decline but certainly now the steady increase that we've been expecting in terms of the interest rates. And we're going to be going through those shortly. And of course, how years of consumer can be best prepared and also how to navigate those times because I think in as much as we've kept saying rates went down quite significantly, they're going to go up and they're not going to stay low for an extended period of time. We know that there's still quite a number of consumers who still got into either unsecured debt or even went and acquired some properties. But I think that's quite a big thing. And all the analysts and economists that I've heard speak, talk about the importance for consumers to buckle up and where you can pay down as much of your debt as you can. So if you've got any unsecured debt, certainly pay that down. And of course, with your home loan facility, if you can afford to try and put in extra in your home loan facility. Now, Marcel, one of the things that you mentioned, of course, was that we've seen that the Russia-Ukraine crisis has certainly had an impact, not just on the housing market or interest rates, but certainly on other factors, commodities markets, the price of oil, the price of wheat, the price of flour. And in many ways, many of us across the world actually, not just in South Africa, are feeling the impact in different ways and in different shapes. Let's perhaps look at how geopolitical factors and some of these macroeconomic factors do actually play a role in the interest rate that we ultimately get in South Africa. Because I know that with many South Africans, and I used to be like this before, before having the benefit of studying the stuff, but we always wonder where we even get these numbers. I used to watch the Reserve Bank governor when I was younger, and I think back then it was actually Mr. Mohini, and we always wonder where do they get this. And I mean, obviously now with the benefit of having done applied macroeconomics and all sorts of other courses, I have a better understanding of why that is. But I think for the benefit of our viewers, how do these different geopolitical factors, macroeconomic factors, and even black swan events, I mean, we saw it in the onset of COVID, having an impact on the interest rate that ultimately gets charged locally and of course in other markets as well. It's crazy, right? I mean, all has changed so much. So we are all connected, or we're all connected, no matter if you're sitting in Russia, or if you're sitting in the US, UK, Germany, or Zambia, or wherever, we're all connected. A movement in climate, in Argentina has got an impact on our group yield, and the prices we get in foreign aid yields in South Africa. So the reality is, given the international trade markets, we're all connected. And what happens in China affects us. What happens in the US affects us. South Africa's trade relationships are mainly with the Western countries, or so-called the West, as opposed to the East, but notwithstanding anything that happens in Zambia. As you rightly know, the war on Ukraine pushes up oil, it pushes up your cost of driving to work or driving your kids to school. It drives up wheat prices. And unfortunately, that's just the way of the world. So we're not isolationists. We're a globally connected country in a globally connected world. Black swan events is fascinating. And I think thinking back, I actually had a presentation to my whole company, Lidon this morning, because it's about two years ago exactly, when we were in lockdown. And nobody saw it coming. I think the beginning of March 2020, we're sort of thinking about this thing called coronavirus, and what are we going to do? And the reality is, you know, Black swan events are out there, and it's going to happen. And so the question becomes, how do you incorporate that into your business model, right? And how do you incorporate that into trying to run a successful enterprise? And as a consumer, how do you incorporate that into your own budgets? And I think the biggest lesson of these Black swan events is that you need to have sort of a buffer, whether it's as a private individual who's got a home loan and a family that you want to support, or you know, even your sister yourself, you need to have a buffer so that when these Black swan events impacts interest rates, you've still got a little bit of savings that you can dip into. Obviously, it helps to have sort of a view that you can put away money every month, even if it's as little as 100 grand, it all starts pulling up. So yeah, I mean, Black swan events is here. I think we've all learned a huge amount about how to run a business. But I think importantly, the thing that nobody saw coming, and the viewers can tell me in the chat or the conference box, if anybody of them saw it coming. But certainly, nobody saw coming that COVID was actually going to have a usually beneficial impact on property prices. What we saw, definitely after the first nine or 10-week lockdown, was that there was this built-up demand and people had sort of been cooped up in their houses and thought, you know what? I am going to go and invest in that property that I want to live in because now I'm going forward. I want to study space. I need space for my children that are not in my room the whole time. I want to fire the internet and I really want to invest in making my property not just a place to live, but also a good place to work. So we saw a huge sort of behavioral change in how home owners, existing home owners, saw home ownership. So we saw a lot of selling, moving to areas where people could afford larger prices, a lot of semi-gration out of sort of the center of Joburg into out-of-the-line areas like the West Rand or East Rand or even down to the South Coast. And then I think what followed on from that was the significant drop in interest rates, which meant that suddenly you had all these first time, all these really good tenants who had really good credit scores who sort of realized, hold on, I don't want to be paying off somebody else's bond. I'd rather take my rental money and put it into my own bond and build up my own equity and my own wealth over time. So we saw the rental market go through a significant decline, as I'm sure you guys have seen and we've spoken about, where prices came under huge pressure and the first time buyers market booming, people being able to afford home loans and invest in property to invest in their own future. So these black swan events are fascinating. I've certainly written down the notes that one day when this happens again, I'll learn from the mistakes I made in this time round. You know, Marcel, I think the one thing we're hoping that we don't get to experience another black swan event in our generation, although it doesn't seem like that will be the case. I mean, I'm seeing a lot of analysts saying that we're likely to have more pandemics. They're going to look slightly different, but we almost need to buckle up. The era of, I think this generation, certainly this generation of millennials, we're going to be the generation that has experienced it all. So by the time a lot of millennials reach 35, you've likely been retrenched already, you've gone through the housing crisis, certainly the older millennials, you've also now gone through and are going through COVID and have had to navigate that. And of course, the financial implications of all of those. So we are a unique generation in that sense. We're having many lifetimes squeezed into a very short period of time, unfortunately. Now I want us, Marcel, to stay with this trend and then look at what then does typically happen, particularly in the housing market, whether it's even the rental housing market, the behavior of sellers and buyers in periods of low interest rates, and as they rapidly increase. So what kind of behavior do we typically see in the market when we're in relatively similar, in a similar environment? And we already know we're going to get the increases. Where do we expect the behavior to go based on what we've seen in the past? I'll gladly talk to you, but I just want to comment on your comment around seeing so much as a generation. I think what if, you know, privilege is it for our generation to experience this? Not only did we go through the financial crisis in 2008-9, we've now gone through coronavirus. And there's significant lessons to be learned out of both of these Black Swan events. And the first thing to say is it's going to happen again. It's going to happen the next 10 years or 15 years. But when it happens again, make sure to buy equity at the bottom of the market. So make sure that you do that. Depending on the type of event, understand the value of property as a primary asset, and therefore make sure that you're in a good position. So I look at it and I think, of course, it's been horrible. And of course, you know, condolences to all everybody who's been affected by it. But I think from a financial perspective, a phenomenal opportunity to learn lessons for yourself and to start thinking about how do you make sure your position in a way to take advantage of these market forces when the next Black Swan event happens. Just on the second part of your question around buyer and seller behavior when in high and low interest rates environments, I think the first and most obvious thing is when interest rates are low, prices are higher. And a very simple reason for that is because you're paying less as a buyer, you're paying less interest on the money you loan, the banks willing to to to loan you more. So a very simple example is if you are going to, if you've got 10,000 grand free cash that you can apply to a bond after now, your salary and your PAYE and your food and your petron, all that stuff, you can see you've got 10,000 grand. At a 7% prime interest rates, you know, that equates to a roundabout a loan of 1.3 million grand that you will get for paying 10,000 grand a month. And so when you then have a 1.3 million grand, you are going to go to a homeowner and you can offer them 1.3 and that you hopefully you'll transact that price. But at 7.75% that we, the prime interest rates that we are now at for the same 10,000 grand, I can only afford a house or a loan of 1.23 million grand. So it's a 70,000 grand differential over the course of a 20 year loan in terms of selling price, right, that I can afford to offer my set. Now that's again got two implications. One is that sales prices are going to come under pressure. I think over the course of the last two years, we have seen quite nice growth somewhere between 4% and 6%, a little bit higher in different pockets in South Africa. But we've seen really nice price growth coming through, but that's going to come to an end as interest rates rise. When interest rates are higher, people can afford less of an offer price for the money in the free cash from the pocket. So that's the first thing, low interest rate environment, high prices, high interest rate environment, lower prices. So that's from a buyer's perspective. It's both from a buyer and a service perspective. And then the second thing is that people need to know is that obviously even every person, as you as you noted earlier, needs to make their own sums and look at what's the differential between lending money at different rates. If I've got an investment and call it, I don't know, a high yield bond or equities that's giving me 9% per year versus my home loan that's now giving 7.75%, it still makes sense to earn money in the 9% environment. Can you earn 1.2% more? But the reality is, if you've got cash sitting in a 2% a yield environment, and you're not buying 7.75%, it makes sense to put that cash into your home loan. So we are a challenging environment, but it's one that teaches us to think in our feet. Well, Marcel, that's where we're going to leave it this evening. Thank you so much for joining us on the show. Thank you very much. Appreciate your time. And that is Marcel DeToy, who's the CEO at Lead Home Properties, wrapping up the Tuesday edition of the Private Property Podcast with myself as I'm a don't walk home alone. It has been a pleasure to be with you this evening. We're back on your screens tomorrow at 7pm. Until then, hoping you're staying home and staying safe.