The Reserve Bank has completely missed the mark with their decision to retain the repo rate at 3.5% (home loan base rate at 7%), commented Samuel Seeff, chairman of the Seeff Property Group. The country and economy desperately need a stimulus and, while probably expected, it is disappointing that the bank has not taken the opportunity to provide some impetus.
All that can, must be done from a domestic perspective to stimulate the economy and contain business and job losses. There was opportunity for a rate cut during the last two Monetary Policy Committee meetings as evident from the split decisions, especially in January when inflation fell to a 16-year low. Inflation has declined further in February to 2.9%, well below the bank’s target, providing ample motivation for a rate cut.
Seeff says that even if the petrol price increase fuels (pun intended!) higher inflation, this would be imported inflation and not as a result of South Africans spending wildly and irresponsibly. In fact far from it. Even in the property market where we have seen the biggest impact of the rate cuts, sales activity still falls short of what we could expect from such a low interest rate.
We are unlikely to see any noteworthy uptick in the economy this year. A potential third wave of the Covid Pandemic is looming, and we are still anxiously awaiting a decisive vaccination roll-out programme without which we remain at an economic impasse.
As we have seen the interest rate has been the biggest factor and motivator for the property market, not just enabling many more first time buyers to invest in their own homes but providing a resultant positive multiplier effect across many industries in the economy.
However, Seeff says that we should potentially have seen much higher levels of activity given that the interest rate is down by about 30% from just over a year ago and it remains a “tale of two markets”, first-time buyers versus high-end buyers. It is essentially only the R750,000 to R3 million price sectors driving the activity that we continue seeing in the market.
High-end buyers continue reflecting the decline in confidence which has been evident since 2017. They are simply not prepared to invest more into the property market until they see GDP growth and demonstrable action on corruption and the State Owned Enterprises. When they do buy, they are spending much less on real estate, possibly choosing to shift the remainder into offshore assets.
Although the interest rate has been great for property, a cut would provide an added boost. The market is currently achieving around 18,000 to 20,000 monthly transactions, reflecting that only about 3% of economically active individuals are buying property. This leaves room for growth in sales volumes, transfer duty for government and the multiplying knock-on benefits for the economy.
Looking ahead, Seeff says the outlook for property remains positive and the market will remain active, driven largely by salary-earners taking advantage of the interest rate. To date, we have seen a steady stream of sellers and may start seeing some stock shortages soon, but for now the market remains well balanced.
Predictable outcome
The Monetary Policy Committee (MPC) has again announced that interest rates will remain stable, keeping the repo rate at 3.5% and the prime lending rate at 7%. Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, says that this was a predictable outcome and, unless things take an unexcepted turn, he predicts that interest rates are likely to remain steady for the remainder of the year.
“Homeowners and first-time buyers continue to find themselves in a favourable position when it comes to the interest rate on their home loan. While a further cut would have helped the many South Africans who are struggling to make ends meet within the current economy, keeping rates at this historic low will at the very least make it easier for homeowners to keep up with the repayments on their home loan within this challenging economic climate,” says Goslett.
While it is unlikely that interest rates will climb this year, Goslett still advises homeowners to leave room in their budget for a possible increase of around 0.5 points during the course of 2021. “The MPC has warned of two potential increases of 25 basis points in the second and fourth quarters of 2021, but this is all dependent on how the economy performs and many economists predict that an increase is not likely to be necessary. However unlikely it may or may not be, homeowners should just bear this in mind when budgeting for the year ahead,” he advises.
As a final word of advice, Goslett explains that activity within the property market has been at an all-time high following the series of interest rate cuts that occurred last year. “Our reported sales figures YTD February reflect a 33% growth on last year and our registered sales are up by 50%. Our partner, BetterBond, has also seen their home loan business grow in value by 46% over this period, underlining how low interest rates have made owning your dream home a reality for many more South Africans. If activity continues at this rate, it won’t be long before we shift into a seller’s market where buyers will have to out-bid each other to secure the home. Before this shift occurs, I would recommend that buyers act fast and make the most of the current market conditions,” Goslett concludes.
Historically low interest rates still represent a buying opportunity for aspirant first-time home owners
With South Africa’s inflation rate below the lower limit of the inflation target at 2.9%, and local inflationary expectations remaining well-anchored, it was expected that the Monetary Policy Committee would keep the repo rate unchanged, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
Says Dr Golding: “This means that the prime lending rate remains steady at a near 50-year low of 7% with indications that it is unlikely to dip further, so for potential homeowners, it is a reminder that if you are thinking of buying a home, now would be a good time to secure an attractive interest rate.
“Economists in the main argued that interest rates are currently at the correct level given the prevailing economic environment. From a residential property perspective, last year’s aggressive rate cuts have fuelled home buying to a large degree, with 2020 surprising many by showing robust home-buying activity. In fact, according to FNB, 2020 registered the highest volume of mortgage approvals in South Africa in more than a decade.
“While the economy is expected to rebound this year, the robust growth rate forecast will largely be the result of comparisons to last year’s exceptionally weak levels. Furthermore, President Biden’s massive US$1.9 trillion stimulus package, coupled with the successful roll-out of the vaccines in several countries, looks set to boost global economic growth prospects, raising concerns potentially around renewed international inflationary pressures and ultimately, higher global interest rates.”
Dr Golding says as a consequence, South Africa can ill afford to continue cutting already historically low interest rates at a time when investors are anticipating that global interest rates may soon be rising. “However, views on when the SA Reserve Bank will ultimately begin to raise local interest rates are varied, with many suggesting that they will remain unchanged until next year (2022), while some believe rates may possibly begin rising towards the end of this year (2021). One thing we do know is that in unusually uncertain times such as these, forecasting is far from an exact science.
“In fact, despite the uncertainties surrounding the pandemic, the market for residential property has so far proven to be one of the country’s more resilient sectors, experiencing an earlier than expected rebound with momentum continuing in 2021, underpinned by the 50-year low interest rates. Combined with generally more realistic pricing, a ripple effect is still filtering through the market, placing upward pressure on demand through the various price bands.
“While some analysts warned that the pandemic and lockdown regulation could cause property prices to slump by up to 15% last year, house prices actually rose by an average 3.05% in 2020, according to Lightstone. The Pam Golding Residential Property Index registered an average increase of 3.2%. This was in line with the consumer inflation rate (which averaged 3.3% in 2020) and actually exceeded the average increase in national house prices of 2.7% (PGP Index) recorded in 2019.
“Currently, and according to the Pam Golding Residential Property Index, South Africa’s house price inflation continues to rebound, rising from a low of 2.5% in April 2019 to 4.1% in February 2021 and promisingly, the recovery in prices is showing no sign of losing momentum. KwaZulu-Natal still leads the recovery with +5.4% in February 2021, followed by Gauteng (+4.8%) and the Western Cape (+4.7%). Noteworthy especially for first-time buyers, and according to the Pam Golding Residential Property Index, lower-end prices (<R1 million) have been on an upward trend since mid-2020, reaching 6.8% from year-earlier levels in February 2021.
Concludes Dr Golding: “Interestingly, while growth in freehold prices outperformed relative to sectional title units last year – perhaps influenced by the desire by many to relocate to more spacious properties as a result of the lockdown restrictions, the gap is now rapidly narrowing as growth in sectional title prices accelerates.”
Repo rate holds steady as demand for residential property grows by 35%
South African home buyers can look forward to a few more months of record-low interest rates as the Monetary Policy Committee has once again opted to hold the repo rate steady at 3.5%.
“While a modest cut would have been welcomed, the five consecutive repo rate cuts announced in 2020 certainly provided ample impetus for the surprise turnaround of the housing market, notwithstanding the pandemic and associated economic challenges,” says Carl Coetzee, CEO of BetterBond. “Keeping the repo rate steady during the first quarter of this year means that aspirant home buyers still have an opportunity to make the most of the record-low prime lending rate of 7%.”
The knock-on effect of the South African Reserve Bank’s aggressive approach to the repo rate is still being realised, with the total value of home loans granted to buyers (excluding cash deals) increasing by 35% year-on-year for the six months ending January 2021. BetterBond’s home loan business grew in value by 46% over this period, as the historic-low interest rates encouraged more potential buyers to apply for bonds.
The latest FNB Property Barometer (dated February 2021), notes that interest rate-induced demand remains strong, although there are signs that momentum is slowing. That being said, FNB’s data is showing better-than-expected house price growth; evidence of “the decoupling of economic fundamentals and housing market outcomes”. In contrast to recent periods, affordability is no longer a stumbling block for many home buyers, says Coetzee. As a result, the average bond size for repeat buyers has increased by 11% in February, year-to-date, and by 12% for first-home buyers.
House price inflation for February increased to 4.2% year-on-year, up from 3.9% in January. FNB attributes the resilience of the property market during the last few months to “ultra-low” interest rates which made bond payments more affordable for those whose income was not affected by lockdown. “With the favourable lending environment, the average deposit required for a first-home buyer has dropped by 7% in February, year-to-date, and by 11% for repeat buyers. Six out of 10 BetterBond applicants secure a 100% loan, which means that no deposit is required,” says Coetzee.
The uptick in first-home buyers is certainly one of the greatest success stories of last year’s property market rebound, says Coetzee. While first-home buyer applications increased to more than 70% between June and December last year, they are also able to afford far more home than this time last year. “According to BetterBond’s applications, the average purchase price for a first-home buyer increased by almost 10% in February, year-on-year. A buyer with a monthly salary of R25 000 is now able to afford a home of just over R967 000, with a monthly installment of R7 500.” The same buyer would have been able to purchase a property of just over R778 000 last year when the interest rate was at 10%. As there is no transfer duty payable on a bond of less than R1 million, a first-home buyer would only have to pay a deposit and the legal costs, a considerable saving that makes home ownership more attainable
“With inflation currently at 2,9%, below the South African Reserve Bank’s target range of 3% to 6%, it is understandable that the Monetary Policy Committee has opted again to maintain the status quo, with no projections of a drop in the near future,” says Coetzee. However, forecasts suggest that two repo rate hikes are possible towards the end of the year, he adds
Adrian Goslett, Regional Director and CEO of RE/MAX of Southern Africa, therefore, advises homeowners to leave room in their budgets for a possible increase of around 0.5 points during the course of 2021. “The MPC has warned of two potential increases of 25 basis points in the second and third quarters of 2021, but this is all dependent on how the economy performs and many economists predict that an increase is not likely to be necessary. Homeowners should bear this in mind when budgeting for the year ahead.”
Goslett adds that activity within the property market has been at an all-time high following the series of interest rate cuts that occurred last year. “Our reported sales figures year-to-date for February reflect a 33% growth on last year and our registered sales are up by 50%. If activity continues at this rate, it won’t be long before we shift into a seller’s market where buyers will have to out-bid each other to secure the home.” Goslett recommends that buyers act fast and make the most of the current market conditions.
“After a record December in 2020 where BetterBond reported a 53% year-on-year increase in application volumes during what is usually one of the quietest periods of the year, we are still seeing a strong demand for bonds. Applications were up 22% for February for the year-to-date,” says Coetzee. “By keeping the repo rate steady at 3.5%, we expect more buyers who have the financial resources to apply for bonds. The current holding pattern is good news for homeowners, and for the continued consolidation of the housing property market.”
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