The decision by the Reserve Bank to cut the repo rate by a further 25 basis points to 3.50%, reducing prime and the base home loan rate to a further historic low of 7.0% is a welcome relief for the property market and households.
The decision was expected given that inflation dipped to a 16-year low of 2.1% for May (from 3% in April). With the overall inflation outlook for the year well within the bank’s target range of 3% to 6% and the Rand rebounding, we should be expecting more, he says.
While welcomed, Seeff remains of the view that the bank should be taking a more aggressive stance with deeper cuts to boost the economy and property market during this unprecedented economic recession. People are not spending and the economy is simply not moving. More needs to be done to give momentum to the economy and property market, he says further.
As expected, property has rebounded on pent-up demand under Level 3 with keen buyers who had been waiting to take advantage of the favourable conditions eager to physically view properties and get their offers in. For many areas, it has been the busiest period this year, and in some instances, activity has been on par with the same period last year, but it is vital that we keep the momentum going.
At the same time, buyers need to be mindful that while we are generally in a buyer’s market, they must be realistic with their offers, says Seeff. Although there is good demand in the market, there are very few desperate sellers.
Most sellers are prepared to wait for the right price. While we are seeing some discounts at the top end of the market, there is very little below R1.8m with only the odd serious seller giving nominal discounts. Buyers who are not adjusting to this may well be left disappointed.
An important aspect in the current market is that each area differs in outlook and how it is slanted towards buyers or sellers. While analysts and news reports provide insight into general trends, sellers and buyers should consult with local area experts about their particular area.
Home buyers responding to interest rate cuts
The further reduction of the repo rate by 25 basis points to an all-time low of 3.5% takes the prime interest rate down to 7%, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“Having already slashed the repo rate by 275 bps to soften the effects of Covid-19, the Reserve Bank had room to adjust the rate, given that the consumer inflation rate slumped to 2.1% in May - the lowest in almost 16 years (since September 2004). Furthermore, price pressures have been subdued for some time now, with the inflation rate at, or below, the midpoint of the 3-6% target for 18 consecutive months.
From an overall residential housing market and Pam Golding Properties perspective, we’ve seen the meaningful reduction in the repo rate for the year to date having a positive impact on demand – particularly in the lower price band below R2 million, where we are experiencing a high uptake among first-time and other buyers and investors. However, we are also successfully concluding sales in the middle to upper price bands, especially from R2 million to approximately R5 million.
Apart from a pent-up demand as a result of the lockdown, home buyers are responding well, not only to the significantly reduced interest rates, but also to the opportunity to capitalise on the zero transfer duty payable on properties selling for up to R1 million. As a result, ooba reports that home loans extended to first-time buyers remained elevated at 54.7% in June.
We have also seen some international buyers investing in property in South Africa, taking advantage of the weaker currency.
Encouragingly, financial institutions continue to demonstrate an appetite to extend credit to home buyers. Deposits continue to decline as a percentage of purchase price, according to ooba, with May (at 6.7%) and June (at 8.1%) the lowest percentages on record (series started in May 2007). Positively, applications for 100% bonds received by ooba surged to 67.5% in June, with an approval rate of 79.9% during the same month.
While inflation may rebound in the months ahead, as a result of the rebound in international fuel prices, there is currently little price pressure in the economy due to demand destruction as a result of the lockdown. The Reserve Bank’s initial GDP forecast of -7% in 2020 may well prove to be too conservative and may therefore be revised to show larger decline, thereby creating space for further rate cuts over the next 12 months – as will the fact that both consumer and business confidence are at, or near, record lows, while renewed load shedding and recent stricter lockdown measures will further depress economic activity.
With national house price inflation continuing to decelerate, easing to 2.4% in June from 2.6% in the first quarter of 2020, we are optimistic that savvy home buyers and investors will continue to take advantage of the access to finance and value for money on offer in what is currently a buyer’s market.”
