The news that the prime lending rate had been cut by a further 50 basis points, bringing the rate to a thirty year low of 8.5 percent, came as a major surprise and will undoubtedly bring welcome relief to those who have been feeling the full effects of the economic downturn.
The majority of South African homeowners have had it tough over the past five years. Many have defaulted and lost their homes and others are battling to meet bond repayments. It may not seem like much, but it goes without saying that large numbers of SA homeowners will be celebrating the reduction in the monthly amounts payable on their bonds.
In actual fact, the drop in the interest rate since 2008 has had a significant impact on bond repayments. In the last four years, the repayment on a bond of R500 000 payable over a 20 year term has decreased by a staggering R2 430 per month. Similarly, on a 20 year bond of R800 000 the repayment has dropped from R10 831 to R6 943, which equates to a saving of R3 888 per month. In December 2008, the repayment required on a bond of R1-million was R13 539. Today this figure has dropped to R8 678.
The interest rate drop is not only good news for existing homeowners as the decrease is going to have a profound effect on those entering the property market for the first time. During the boom period, house prices rose dramatically. This is no longer the case and, although not stagnant, the value of property is now rising at a much slower pace. In a nutshell, there probably isn’t a better time to invest in property.
Although traditionally rate drops do not fuel sales, the fact that the rate is now so low could well boost the real estate market. The problem with this, as far as buyers are concerned, is that demand fuels house prices. Those who sit back and wait for ‘better days’ may find that by the time they do get around to investing, the rate cut doesn’t mean that much, because the average price of property has risen to such an extent that they will find it far more difficult to enter the market.
Many insist that renting property in South Africa is cheaper than buying. However, given the rate cut and subsequent savings, this may no longer be a valid argument. It pays to remember that the price of property has been rising by 11.25 percent per annum since 1966. When one takes into account the compound effect of this, it means that a house bought for R9 516.00 during the mid 60s would cost approximately R1.035-million in today’s market. By using the same formula, this effectively means that a home bought for R1-million in 2012 will be worth a staggering R66-million in 2050.
The effect of the increase in property values is also going to have a dramatic effect on the amount of rent paid by tenants. In 20 years’ time, it is estimated that the rental payable on a property valued at R1-million will be in the region of R62 394 per month. Even though salaries will rise according, this is still a terrifying thought.
The message is clear that no matter how daunting the decision may seem, sitting back and waiting for your ship to come in is just not a sensible option. Do as your parents did - don’t aim too high and assume that your first investment is one for life; start with baby steps, buy what you can afford and, as is clearly evident, the rewards will automatically come your way.