Question

How did the change in interest affect a property company in South Africa? If you had been forewarned about this economic change, would you have planned and strategised differently? Provide substantial reasons for your answer.

Answer 1

Interest rate changes has a huge impact on the real estate market. They affect the cost of financing and also affect the mortgage rates. Rate of financing and mortgage impacts the property level costs and this in turn affects the values.

South Africa faced a similar situation when the interest rates were altered. The Real estate prices went high causing the sellers to raise the prices. This was also constituted by the interbank lending rates as they contributed to the increase and decrease in the amount of capital available for investment.

Cost of capital and capital availability are two important factors that will be altered due to interest rate fluctuations and they both work together in determining property values.

Had we known about this earlier, we could have certainly devised strategies to overcome the sudden hike in interest rate. Surplus capital could have been generated and return on investment could have been working accordingly.