One question that is always asked at the exact wrong time is: "Should I fix the interest rate on my bond?"
The timing - almost always when the interest rate is sky-high - is not only off, but motivated by panic. Yes, we all feel as if we're on the Titanic heading towards a financial iceberg with an inflation storm raging around us, but now is not a good time to fix the interest rate.
In a presentation that I recently attended by John Loos from FNB about the property and finance market, he firmly agrees with this. You should never ask for a fixed interest rate to try and beat the market - simply because you won't.
Fixed interest rates are a way of obtaining certainty over a part of your cash flow, especially if you can't afford any uncertainty or surprises in your finances, and are already living on the financial edge. So if cash flow security is your goal, always have the interest rate fixed when it is going down, not up.
When the bank offers you a fixed rate, they take your risk away from you and they take it onto their own balance sheet and present it on the swap market, explains Loos. When the interest rate rises, with an expectation that it will increase even further, the swap market will offer very unattractive interest rate swaps.
So you might get allocated the current high interest, plus some, as a fixed rate. However, when the swap market expects that the interest will decline, you should get a more favourable rate.
So if you want to fix your rate for a period of five years, for example, you should arrange this when the interest rate is declining or is widely expected to decline.
What are three current trends in the property market?
1. Rate hikes have increased mortgage instalments. Affordability has deteriorated and shows a decline of about 6,4 percent.
2. In an FNB survey that was done among estate agents, it became clear that the property market has slowed down, with properties staying on the market longer before being sold. Interestingly, agents are still experiencing stock shortages.
3. The survey also shows a shift of activity towards the more affordable end, especially properties lower than R750 000. This shift is also affected by the higher inflation rate, as well as the increase in food and electricity prices.
How does the weak rand affect the property market?
Some economists say the weaker rand should be good for export; it should make it more competitive. Theoretically, they are right. Local products become cheaper for foreigners, also property. South African property is therefore an attractive option for investors with foreign currency - especially property on the coast. That is the selling point of the weak rand, says John Loos in a recent presentation by FNB about the current property and finance market.
However, in general, the effect hasn't historically been positive in South Africa. It puts upward pressure on the inflation rate, and it is not good for property demand locally. It dampens the national mood and it often boosts skilled labour emigration.
This is not good for South Africa as we have a service-dominated economy driven by skills.
So overall the weak rand is a negative for the housing market but if you have prime coastal property, that could be an attractive investment for foreigners - not only foreign investors, but retirees. According to Loos the savings rate has globally been on the decline resulting in retirees and remote workers looking for more affordable countries to move to so that they can keep up their standard of living. This could make South Africa a cheaper and more desirable remote working and retirement destination for foreigners.