Following a cut in interest rates at their last meeting in January, and the Finance Ministers decision to lower income tax levels during the budget speech in February, the Monetary Policy Committee (MPC) announced some further relief for South Africans today by lowering the interest rate by 100 basis points. The repo rate therefore drops to 5.25%.
According to Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett, this announcement comes at a time when the economy needed it the most. “Ongoing load shedding and global panic around the coronavirus is grinding the South African economy to a holt. GDP has already contracted by 1,4% in the fourth quarter of 2019 and grew by a dismal 0,2% in 2019. Especially after the US Federal Reserve cut interest rates on 3 March to stimulate their local economy, I remained hopeful that interest rates would drop to align with international standards. It is encouraging that the MPC has made the decision to lower interest rates at this meeting, as this will help towards keeping our economy somewhat stable over this time,” Goslett explains.
As much as this announcement will provide further relief to homeowners who are battling to keep up with their monthly repayments, Goslett predicts that this drop in interest rates is unlikely to have any major effects on the current housing market apart from lessening the number of homes that will enter the market as a result of the bank’s distressed property sales programmes.
“Lower interest rates usually incentivise consumers to take on new debt. However, given our current economic outlook, it would be wiser for consumers to use this break to keep up with the repayments on their existing debts. When an economy shrinks, debt becomes increasingly expensive, along with all other consumable goods and services. Despite the interest rate cut, consumers should, therefore, think carefully before taking on any bad debt during this time,” says Goslett.
To clarify what he means by bad debt, Goslett explains that credit card debt is an example of bad debt that will continue to eat into your disposable income and can have devastating long-term effects if not managed correctly. “Property investments, on the other hand, are a form of good debt that will generate high returns in the long run. The interest paid on this kind of debt therefore justifies the expense. Rather than taking on bad debts, homeowners can take advantage of the interest rate cut by redirecting the money they’re saving straight back into their home loan. This will save them on interest charges and reduce their home loan period by months or even years,” Goslett concludes.
Timeous reduction in the repo rate – property stands the test of time
Against the backdrop of the unprecedented times we find ourselves in, today’s (19 March 2020) decision by the Monetary Policy Committee to reduce the repo rate by 100bps is a critical step towards financial survival, as consumers and our economy navigate unchartered territory and unexpected new challenges as a result of the onset of the Coronavirus, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“The ensuing reduction in the interest rate, coupled with next month’s (April) likely substantial drop in the fuel price as a result of the dramatic reduction in global oil prices - despite the additional 25c a litre tariff increase as announced in the recent National Budget, affords some relief to South African consumers and hopefully part of the boost our economy needs right now.
“Given the extreme volatility currently being experienced in global stock markets, it is probable that, as has been seen over decades in times of great turmoil, we will see increased confidence in bricks and mortar among investors and home buyers.
“As property has over the longer term proven a sound investment, it stands to reason that many will regard the residential property market as a safe haven amid the heightened economic uncertainty caused by a global pandemic.”
Looking at the recent past, according to the Pam Golding Residential Property Index, while national house price inflation continues to slow – to 1.95% in February 2020, house price inflation in Gauteng appears to be stabilising at 1.91% while both the Western Cape and KwaZulu-Natal housing markets continue to rebound at 5.36% and 3.12% respectively.
Positively, says Dr Golding, and on the back of the adjustment in the transfer duty threshold for zero payable on homes up to R1 million, the percentage of home loans extended via ooba to first-time buyers rose to 52% in February (2020), the fourth consecutive month this has exceeded 50%.
“Furthermore, 60% of all applications received by ooba are from buyers with no deposit, with four out of five buyers successful in their bid to secure a 100% bond. On average, mortgages facilitated by ooba accounted for 89.6% of loan value in February, the highest percentage on record (since 2007). In addition, loans extended for holiday homes recovered further last month (0.3%), while mortgages for investment properties rebounded to 7% of all mortgages facilitated by ooba from a weak January 2020.
“But all of this may be academic as we head into the unchartered territory of a Coronavirus affected world and where we will have to see its effects on the property market both in short and medium term as it unfolds”.
Adds Dr Golding: The Reserve Bank will undoubtedly continue to closely monitor developments in the local economy, and will presumably stand ready to cut interest rates further should the need arise.
“Naturally, at this difficult time we are prioritising the safeguarding of the health and safety of our employees, agents and clients, taking every measure to mitigate personal risk while ensuring the continuity of our business operations and continuing to provide real estate services to buyers and sellers wishing to transact.”
Significant drop in repo rate welcome relief for all South Africans
Bruce Swain, CEO Leapfrog Property Group
For the second time in as many months, the South African Reserve Bank’s Monetary Policy Committee has dropped the repo rate, this time by 100 basis points, from 6.25% to 5.25%.
While economist and analysts were anticipating another drop, the speculation was that Reserve Bank Governor Lesetja Kganyago would opt to drop it by only 50 basis point. In light of ongoing concern and uncertainty around the effect of the Covid-19 pandemic on the economy, in addition to the challenges we already face, this is a welcome move that relieves the financial burden on all South Africans.
For the property market this is especially positive and bodes well for those looking to purchase property, particularly for the first time. A lower interest rate, the threshold on transfer duty that was recently raised to R1 million, and the fact that a buyer's market means more room for negotiating on the part of the buyer are all good reasons to invest in property. What's more, property has a proven track record of being a stable investment in times of turmoil.
Applause for rate cut, advice for home buyers
The one percentage point drop in the Reserve Bank’s key repo rate is decisive and very welcome in the light of the struggle that lies ahead for SA’s property market this year, says Tony Clarke, MD of the Rawson Property Group.
The Monetary Policy Committee decision announced on Thursday 19 March will see the repo rate drop from 6,25% to 5,25% and the prime rate from 9,75% to 8,75% - its lowest level in years.
For existing homeowners with bonds, this will mean a reduction in their monthly instalments of R65 per R100 000 outstanding – or R650 per month on a R1m bond.
“This is a significant amount,” he says, “and we would urge those who can afford to do so to keep paying their current monthly instalment as long as they can, to reduce the capital amount owing on their bond, pay their homes off faster and save on interest.”
By paying an additional R650 a month off a R1m bond, a homeowner could cut the usual 20-year bond repayment period by more than three years and stand to save some R209 000 in interest.
For homebuyers, this week’s rate cut will make it easier to qualify for home loans, since it will also reduce the instalments they have to pay on any other kind of debt, from car instalments and school fees to credit and store card balances, and they should thus have more disposable income available to cover a monthly bond repayment.
However, says Clarke, buyers should be cautious about taking the rate cut as a signal to obtain a bigger home loan than they were previously contemplating. “This cut and the additional ones expected later this year will bring rates close to historic lows, which means they can be expected to rise as soon as the economy improves.
“So our advice now would definitely be not to buy a bigger home or take out a bigger loan, but to give yourself plenty of leeway to afford an increased monthly instalment should rates start to rise. In the meanwhile, if you do have any extra cash available because your other monthly repayments have gone down, use it wisely to pay off as much debt as you can.”
Looking ahead, he says a one percentage point increase will probably not be enough to take the SA economy out of recession, or to stave off a decline in the property market.
“But combined with the tax cuts announced earlier this year and the large drop in the petrol price expected in early April, it will do a great deal to keep inflation at reasonable levels despite the drop in the Rand exchange rate. That will help many families to keep their heads above water while we wait to see what the final effects of the Covid-19 pandemic will be on the global economy and our own. It will also boost consumer confidence, which is a key factor in maintaining positive momentum in the real estate market.”