The lowest repo rate in almost 50 years could help the property market to weather the current recession.
On Tuesday 14 April 2020, the South African Reserve Bank (SARB) cut its repo rate by a further 100 basis points following a 100 basis point drop in March. This second cut takes the repo rate down to a record low of 4.25%, which results in a reduced prime rate of 7.75%. This is the lowest level since 1973, when the prime rate was 7.5%.
The bank moved its May Monetary Policy Committee (MPC) meeting forward as a result of the negative effects on the economy of the Covid-19 pandemic and the current national lockdown.
“Lots of things have changed since the March meeting,” SARB Governor Lesetja Kganyago said during Tuesday’s online conference with journalists and other members of the MPC.
Near term prospects
At its March meeting just three weeks previously, the SARB forecast a 2020 contraction of 0.2% in the SA economy, but now expects it to contract by 6.1%. This is the biggest loss of output since the Great Depression of the 1930s.
“The Covid-19 outbreak will have a major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty. GDP is expected to grow by just 2.2% in 2021 and by 2.7% in 2022,” the MPC statement said.
“Economic contractions world wide are expected to be deepest in the second quarter of 2020, with some recovery anticipated in the third quarter of the year. The strength of the recovery into the fourth quarter and 2021 will depend on how quickly countries are able to open up for economic activity safely. This will require sustainable social distancing rules, safety processes put in place by businesses and public institutions, and the capacity of hospitals to accommodate those in need.”
The SARB said that credit risk has risen back to 2008 levels and about R100 billion of local assets have been sold by non-resident investors. The rand has depreciated by 22.6% against the US dollar since January and by a further 17.3% since the March meeting of the MPC. This shows that the pace at which the currency is losing ground is picking up fast.
“The bank’s headline consumer price inflation forecast averages 3.6% for 2020. The overall risks to the inflation outlook at this time appear to be to the downside,” the SARB statement said. This gives the bank space for further cuts.
Effects on property
“The substantial cumulative easing in interest rates so far this year – 225 basis points in total – is now offering significant relief to home owners and indebted households,” says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“Although this won’t offset the negative effects of a total loss of income for many people during the lockdown, the MPC’s latest move will go some way towards easing the pressures on the residential housing market. It will provide relief for those with mortgages or those applying for finance to buy a home and will help to pave the way for recovery once the lockdown restrictions ease and economic activity starts to recover.”
“The 1% repo rate cut means that it will be somewhat easier for South Africans to qualify and pay off their home loans, once things return to normal,” says Mike Greeff, chief executive of Greeff Christie’s International Real Estate.
Samuel Seeff, chairman of the Seeff Property Group, expects that the property market will emerge from the lockdown with a level of pent-up demand, but still mainly in the primary residential market to around R1.5 million and up to R3m in some areas. Above that price level, especially where buyers are not so reliant on mortgage finance, Seeff believes that activity will remain muted.
For investors and home owners with existing mortgage loans, the interest rate cuts will mean a drop of around R62,80 for every R100 000 outstanding on the loan. For those with a bond of R1 million, for example, the monthly repayments will drop by R628 a month.
Regional director and chief executive of RE/MAX of Southern Africa, Adrian Goslett, advises South Africans to use the low interest rate period to pay off debt as quickly as possible.
“If you can afford it, keep your mortgage repayments at the same level as before the reduction in interest rates. If you were paying R10 000 a month, then continue to pay this amount so that you can shorten your loan term and save on interest charges. If not, then use the money you save on interest charges to avoid buying items on credit and getting yourself into further debt.”
For those planning to buy a home, the drop in interest rates will now make it easier to qualify for a home loan, because the required household disposable income will be lower. It will also make it easier for new owners to afford their monthly home loan repayments.
“This is an ideal opportunity for those who have been considering buying a property – either as an investment or as a move up the property ladder,” says Bryan Biehler, managing director and co-owner of Huizemark.
“The record low interest rate opens doors for those wanting to buy property as a long-term investment. Those who wanted to buy in specific neighbourhoods but couldn’t afford the prices; or those who were renting because they couldn’t afford to buy, may very well now be able to consider putting in offers to purchase,” says Biehler.