MAIN IMAGE: Nicky Weimar – Nedbank chief economist, Samuel Seeff – chairman of the Seeff Property Group, Stephen Whitcombe – MD of Firzt Realty group, Adrian Goslett – regional director and CEO of RE/MAX Southern Africa, Herschel Jawitz – CEO of Jawitz Properties, Rhys Dyer – CEO of ooba Group, Berry Everitt – CEO of Chas Everitt International property group, David Jacobs – regional sales manager of Rawson Property Group, Jacqui Savage – national rentals manager for Rawson Property Group, Yael Geffen – CEO of Lew Geffen Sotheby’s International Realty, Dr Andrew Golding – chief executive of Pam Golding Property group
Editor
After a 14-year high, the prime lending rate has finally dropped for the first time since November 2021, and the repo rate has been cut by 25 basis points.
Nicky Weimar, Nedbank chief economist, said, “The decision was unanimous after considering a hold and a possible 50 bps cut during deliberations. While The MPC appears slightly more dovish but remains cautious. It stresses the upside risks to inflation emanating from the unpredictable geopolitical environment, political uncertainty in various parts of the world, and domestic electricity prices. The central bank views the risks to the inflation and growth outlook as balanced”.
Samuel Seeff, chairman of the Seeff Property Group, has said that while the rate cut is welcomed, it is disappointing that the Bank has missed the opportunity for a more robust cut to stimulate the economy.
“There were more than adequate reasons for the Bank to provide a 50 basis point cut, and it is concerning that the Bank appears to be taking a hawkish stance, particularly since the US Fed opted for a bold rate cut of 50 basis points. Inflation is down to within the Bank’s target range, the currency outlook has improved, as have the economic indicators”.
“Most economists agreed that…this cut signals the start of a rate-cutting cycle that will last well into next year and may well see the prime rate fall to below 10% – barring any unforeseen global or local disasters that cause a sudden increase in inflation,” says Stephen Whitcombe, MD of the Firzt Realty group.
“This cut will create much-welcomed relief,” says Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett. Looking at how this decision will affect the housing market, he notes that this should be a positive step forward for house price appreciation.
“Interest rates have remained high since May last year. This has put financial pressure on most households with some form of debt. Apart from the Western Cape, house price growth has been stifled somewhat due to the lowered demand created by this financial pressure,” says Goslett.
However, Goslett adds that the effect of this cut is usually felt 5-12 months later. “The cut will have some bearing on consumer sentiment now, but it is likely to only affect decision-making further down the line once the market adjusts to the lower interest rates.”
Why did it happen?
This long-awaited cut is undoubtedly partly attributable to the consistent decline in the consumer price index and the edging of inflation closer to the midpoint of the Reserve Bank’s target range, says Herschel Jawitz, CEO of Jawitz Properties. Jawitz indicates that BetterBond hopes this positivity will be reflected in the housing market, with slightly lower interest rates making it possible for more buyers to invest in property. The originator has already seen a 6.5% quarter-on-quarter pick-up in bond applications, and we expect this trend to continue over the next few months if the prime lending rate continues to drop, as economists expect.
Rhys Dyer, CEO of ooba Group, explains that four factors have led to the MPC’s decision to cut rates:
1) The GNU formation
The May 2024 elections kicked off positive change after a few tumultuous years. The formation of the newly established GNU was met with a positive reaction from financial markets, reflecting optimism on the progress of the much-needed, long-awaited structural reforms.
By the end of August, the rand had rallied to a 13-month high against the US dollar, boosted by improved investor sentiment toward South Africa and a weaker US dollar as markets began to discount lower US interest rates.
2) Easing of inflation
Local inflation has declined faster than anticipated to the SARB’s 4.5% target rate following the easing of food and energy prices. In August, headline inflation declined to 4.4%, while core inflation (excluding food and energy prices) had fallen below the Bank’s target at 4.1%. Both are now well below the 4.5% target.
Central to the MPC’s decision-making, the Bureau of Economic Research (BER)’s Q3 ‘24 inflation expectations survey confirmed a continued easing in inflation expectations. Analysts, businesses, and trade unions expect inflation to average 5.1% this year versus 5.3% in the Q2 ‘24 survey. Thereafter, all three groups expect inflation to average 4.8% over the next five years (versus 4.9% in Q2 ’24).
With the inflation rate now falling below the Bank’s 4.5% target, real (inflation-adjusted) interest rates have risen to an 18-year high, creating an overly restrictive monetary policy stance and ample scope for the SARB to continue cutting interest rates.
3) US Federal Reserve leads the way
Another positive for the local interest rate outlook centred around the continued easing of US inflation coupled with the job market cooling
Following a 23-year high, the announcement of half a percentage-point rate cut in the US yesterday signals the start of plans to implement 100 bps in rate cuts before year-end, with a total of 200 bps in cuts forecast for the current easing cycle.
With US interest rates declining faster than local interest rates, the rand is likely to retain its recent recovery, helping to contain imported price pressures.
4) Goodbye loadshedding – for now
The impact of 175 days free from loadshedding can also not be underestimated. While loadshedding has hampered economic growth and our investment outlook for years, the relief experienced in 2024 has provided some much-needed recovery.
What’s happening in the market?
Berry Everitt, CEO of the Chas Everitt International property group, says that there has been a steady growth in both demand and sales since the start of the year, and this is supported by the latest statistics from leading mortgage originator BetterBond, which show 3,5% YOY increase in the number of home loan applications to end-August, and a QOQ increase of 6,5%. The number of applications approved in July and August was also up 5% in the same period of 2023, while home prices showed an average YOY increase of 6,4%.
Advice for buyers
Everitt notes that the Absa Homeowner Sentiment Index shows that overall consumer confidence in the property market has been trending upward for the past year and rose to 84% in the second quarter of this year from 78% in the same period of 2023.
“The buy sentiment showed an even bigger YOY improvement of 12%, with many currently renting but planning to buy soon noting that they had already saved enough to afford a deposit for a home”.
He predicts that this will bring a large number of first-time buyers back into the market and start to drive property price increases, which will be sustained by significant job creation over the next two to three years as massive capex projects currently in the planning stages are implemented.
Whitcombe says, “The interest rate cuts mean smaller home loan repayments and greater affordability. This means that buyers may be able to purchase a home sooner than they thought or that they may be able to afford a more expensive home than they could at higher interest rates.
The most important factor in these decisions is that at lower rates, buyers will need to earn less to qualify for a home loan. Using the rule of thumb that the monthly bond repayment should not exceed 30% of gross household income, buyers would need an income of R36 100 to qualify for a R1m home loan at 11.75%, but only R35 500 to qualify for the same loan at 11.55%.
In addition, lenders tend to lower deposit requirements when interest rates fall and to be more willing to advance credit, making homeownership even more affordable and attainable.”
David Jacobs, regional sales manager for the Rawson Property Group, says, “This rate cut couldn’t have come at a better time for the property industry. Buyers and sellers have been cautious over the last year, but with rates heading downward, we’ll likely see a renewed sense of optimism. Pair that with the increase in buyer activity we traditionally see during the summer, and I think we’ll have a bumper finish to the year.”
Jacobs expects market activity to increase across the board but with a particular focus on more affordable properties. “The middle-income bracket always tends to be the most active,” he explains, “and with improved affordability, we should see strong demand for homes in the R1 million to R2.5 million range. These price points offer great value, especially for first-time buyers.”
“With homeownership becoming more affordable, some tenants may choose to move from renting to buying,” says Jacqui Savage, national rentals manager for the Rawson property Group. “This could result in a reshuffle in the rental market, with vacancies rising slightly as tenants transition into homeownership.”
While this may pose a challenge for some landlords, Savage believes there are still plenty of opportunities out there.
“Landlords with well-priced, well-maintained properties should still see strong demand,” she says. “Tenants are looking for value-for-money and quality, and those who offer that combination will thrive, even as interest rates drop.”
Advice for sellers
The problem with waiting too long, according to Goslett, is that once most potential buyers decide to invest, demand has already hit higher levels. “And when that happens, house prices go up,” he states.
“If interest rates come down again in November, that would mean that the repayment on the mortgage a buyer negotiates now will be at its highest level. It will almost surely decrease, leaving a buyer with more disposable income or allowing them to pay in more, shorten their loan term and reduce their total repayment on a home loan,” he notes.
Following this cut, he advises real estate agents to organise meetings with clients and a BetterBond consultant to help them plan for the future. This is also a good time to re-engage your sellers and fence-sitter buyers and investors so that they can make the most out of the conditions before they change,” he concludes.
Where to next?
Lew Geffen Sotheby’s International Realty CEO, Yael Geffen says people have been waiting for this cut – either to step onto the property ladder or to upgrade. Everyone was expecting the repo rate to go down in the second half of the year, and buyers have been waiting for it because it makes a massive difference when you’re servicing a bond.
I expect market activity to react almost instantly, which bodes well for South Africa’s property sector for the remainder of the year and significantly brightens the outlook for 2025.
Dr Andrew Golding, chief executive of the Pam Golding Property group, notes that commentators are predicting 50bps rate cuts before year-end, while the Federal Reserve Bank is likely to cut by 100bps by the end of 2024. So, with the Rand holding up and weaker global oil prices, SA analysts are forecasting approximately 50bps during the remainder of 2024, resulting in just over 100bps in total during the next 12 months.
