OPINION: Interest rate cut might spark boom in residential property

Inflation roller-coaster

When interest rates were reduced as a result of the COVID-19 pandemic, many consumers flooded the real estate market. Following the outbreak, the Reserve Bank’s Monetary Policy Committee (MPC) cut the repo rate by 300 basis points, from 6.25% in January 2020 to 3.25% in July 2020.

Banks approved thousands for home loans due to the low interest rate environment. But things soon began to change when inflation began to rise. In the second quarter of 2021, inflation was mostly caused by the combination of increased demand for goods and supply-chain disruptions. This continued throughout 2022 and began to stabilize slightly in the fourth quarter of 2023, into the first quarter of 2024.

However, Consumer Price Inflation or CPI has slowed, with figures showing 5.2% in May, 5.1% in June, and 4.6% in July 2024. This raised expectations that the MPC would unanimously agree to decrease the repo rate by 25 basis points, given inflation is very near to the SARB’s planned midpoint of 4.5%. Thus, the August inflation number – scheduled to be announced in mid-September – will be the most important signal of whether the repo rate will be decreased.

When interest rates were raised repeatedly beginning in November 2021, many South Africans began to struggle; and were unable to afford most basics due to fuel, food, and power costs, as well as the continued weakening rand/ US dollar exchange rate.

Since November 2021, the MPC has hiked interest rates by 475 basis points, sending the repo rate to 8.25% and the prime lending rate to 11.75%.

The Repo Rate is currently at a 16-year high of 8.25%.

The MPC has signaled that interest rates will remain high until inflation reaches its target midpoint of 4.5%.

 Cut the interest rate, but not so fast!

It is effective for the SARB not to rush to cut interest rates before inflation is fully within the target range, as it assessed the danger of inflation to the upside in its last statement. Economists have also advised consumers with debt to be realistic about what’s to come: the cycle will be gradual, and interest rates will most likely be higher than they were before Covid in 2019.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER), advised against getting too enthused about the recent statistics and its implications for the future cycle. The expected rate cut is not expected to make a significant difference or bring major relief to those who are financially distressed by debts as rate cuts will happen over a long time unlike during Covid 19 where within six months over 300 basis points were cut from repo rate.

There is no doubt that interest rate increases cause significant financial hardship, particularly for first-time home buyers and those who purchased when interest rates were at an all-time low. Furthermore, expecting immediate interest rate cuts is impractical. This means that people who bought a home valued at R1 million at the start of the rate hike cycle, when the prime loan rate was 7% (in September 2021), have been paying an extra R3 085 a month on their 20-year bonds at the current rate of 11.75% (since June 2023).

This is an extra R49 360 from June 2023 to September 2024.

Local and international monetary policy looks promising 

Since May 2024, the rand has increased by 6% against the dollar, hitting R17.96 per dollar on 15 August. This was encouraged by a possible US interest rate cut in September. Historically, when the US Federal Reserve (US Fed) cuts interest rates, the rand tends to strengthen. There is a reason, for example, the MPC normally follows the US Fed’s interest rate decisions or attempts to anticipate them by raising its interest rates ahead of the curve.

The rand is commonly regarded as a barometer of investor attitude toward emerging markets due to its liquidity and responsiveness to the US dollar, providing an accurate portrayal of how developing economies fare in comparison to global economic movements by developed world economic superpowers.

Light at the end of the tunnel

Bank property indicators from Standard Bank, ABSA, and FNB show favourable sentiment and a small increase in home loan applications. Standard Bank predicts that the Reserve Bank will begin decreasing the repo rate this year, with the first 25-basis point cut expected in September and November.

The bank’s experts forecast two more cuts in the first half of 2025.  Other economists and analysts, including those from Nedbank and Standard Bank, predict 50 basis points in cuts in 2024 and another 50 basis points in 2025.

In the second quarter of the year, the Absa Homeowner Sentiment Index reveals an increase among single female homeowners.  Single women are applying to buy homes at a higher rate than men. Moreover, many South African buyers are young black women. This particular group of homeowners is becoming key players in the property ownership space. The Index also reveals that more than 60% of South Africans seeking home loans are first-time buyers.

According to Nedbank, buying a home right now demands careful consideration and strict budgeting based on how much one can afford. Dhiren Balwanth, Nedbank’s Head of Home Loans Digital Sales and Service, believes that taking the time to find a property at an affordable price, even if interest rates rise, is crucial for long-term financial security. The Experian Consumer Default Index for the third quarter of 2023 indicated a considerable increase in consumer debt defaults. Furthermore, banks reported a surge in the number of distressed homeowners as home loan payments fell behind. This is apparently having a severe impact, particularly on first-time buyers, many of whom are behind on their mortgage payments.

VELEMSENI MTHIYANE is a Specialist Researcher (Business/ Economics) with the SABC News and Current Affairs division