The SA Reserve Bank cut the repo rate by 0.25 basis points today, the first time South Africans have seen a rate cut in four years.
While the cut was welcomed, some say it should have been by 0.5 basis points and believed the SARB acted too conservatively.
The announcement came hot off the tail of the US Federal Reserve’s announcement yesterday that it had reduced the target for its key lending rate by 0.5 percentage points.
Although there is not a significant savings for South Africa bond holders, the 0.25 cut was met with a sigh of relief from homeowners who have been holding on tight during the upward rate cycle over the past four years. And potential buyers are also relieved that this could mean the beginning of a rate-cut cycle that would improve their affordability and get them on the property ladder.
The rate cut takes the repo rate to 8% and the base home loan rate should be reduced to 11.5%.
The cut however will only put a few rands back in homeowners pockets. “A R1-million bond at 11.75% and with a monthly repayment of R10837, can expect a monthly saving of just R173,” says Chris Tyson, CEO of national real estate agency, Tyson Properties.
“The meaningful change comes if homeowners continue to repay their home loans at the pre-interest rate cut amount against a reduced monthly repayment. The period of the bond will reduce by approximately 2,5 years on a R1 million bond.”
This is the first cut since July 2020 which was at the time prompted by the COVID-19 pandemic’s economic fallout, and saw the benchmark repo rate fall to a historic low of 3.5% at the time.
That period of ultra-low rates (in South African terms) was instrumental in stimulating economic activity and propping up the housing market during a time of significant uncertainty. However, in response to rising inflationary pressures, SARB gradually increased rates, with the benchmark rate currently sitting at 8.25%
Some people, buoyed by the low interest rates of 7% at the time jumped on to the property ladder at the edge of their affordability, and have suffered under the growing rate hikes.
Bradd Bendell, BetterBond head of sales says today’s cut is a positive move in the right direction. He said while the cut is welcomed, 0.5 percentage point would have been a bigger stimulus for the market. “It’s good, it’s not bad, but it’s not great.”
Samuel Seeff, chairman of the Seeff Property Group agrees. “While the rate cut is welcomed, it is disappointing that the Bank has missed the opportunity for a more robust cut to stimulate the economy.
“There was more than adequate reasons for the Bank to provide a 50 basis point cut, and it is concerning that the Bank appears to be taking a hawkish stance, particularly since the US Fed opted for a bold rate cut of 50 basis points. Inflation is down to within the Bank’s target range, the currency outlook has improved, as have the economic indicators.”
He slammed the SARB saying it was “counterproductive to growth at a time when the economy desperately needs a kickstart".,
Betterbond’s Bendell adds it will take time to feel the difference of a .25 basis points from a home loan bond originator perspective, with a shift possibly felt in three months time.
“It is a very conservative move on part of the SARB - but that is what we have come to expect. And we are happy that this is going in the right direction.”
And while South Africa's inflation rate fell to 4.4% year-on-year from 4.6% in July - the lowest since April 2021, “real inflation is something else and that is why they are still conservative”, believes Bendell.
Lower interest rates, he says, will allow those normally excluded because of affordability to get into the market, but this will necessitate a true rate-cutting cycle, he says.
And while most players believe that in November there will be another 0.25 basis point cut, Bendell says there are also some strong opinions that the interest rates could hold stead in both November and January.
“The SARB will want to see if they can contain inflation further before they reduce the rates further,” he believes.
Like everyone Bendell would “love to see another cut this year as this will create true momentum in the market”.
Lew Geffen Sotheby’s International Realty CEO Yael Geffen says: “This benchmark rate cut to 8% is a small step in monetary terms, but a massive one in terms of positive business and consumer sentiment.
“It marks a significant turnaround for South Africa’s economic outlook, off the back of the strengthening rand (trading at R17.43 to the US$ at the time of the MPC’s announcement) and six months of downward trending inflation that reached 4.4% in August; falling below the SA Reserve Bank’s 4.5% target for the first time since April 2021.”
As both inflation and debt costs decrease, households will begin to have more disposable income available to them, says Toni Anderson, head of Standard Bank Home Services.
Standard Bank expects three additional rate cuts of 25 basis points each – one in November and two in the first half of 2025, which could mean even bigger long-term savings. If these expected cuts reduce rates by a total of 100 basis points, homeowners could save R833 per month on a R1 million property in the next year.
Dr Andrew Golding, chief executive of the Pam Golding Property group, describes the cut as a significant moment for the housing market.
“Hopefully this is the start of the long-awaited interest rate cutting cycle, and with things moving both globally and locally in a more favourable direction, it provides scope for further rate cuts and significant relief for households and therefore a more supportive environment for a recovery in the housing market during the next 12-18 months,” he says.
He added that South African commentators are predicting 50bps rate cuts in total before the year-end, while the Federal Reserve Bank is likely to cut by 100bps by the end of 2024. “So with the Rand holding up, and with weaker global oil prices, SA analysts are forecasting a total of approximately 50bps during the remainder of 2024, resulting in just over 100bps in total during the next 12 months.”
David Jacobs, Regional Sales Manager for the Rawson Property Group says: “While inflation and the economic challenges that contributed to the high interest rate are still a concern, the SARB’s decision marks a turning point for the economy. This cut is a sign that we are finally moving in the right direction. And the timing – right before the busy summer season– is perfect to stimulate renewed interest in the property market.”
The most immediate impact of the rates cut will be felt by existing homeowners, for whom the cost of servicing home loans will decline – albeit only slightly.
“Most home loans in South Africa are prime linked,” says Leonard Kondowe, National Manager for Rawson Finance. “That means the majority of bondholders will enjoy a 0.25% drop in their monthly repayments. That’s not a huge amount, but it will allow them to breathe a little easier after a prolonged period of financial strain.”
What is important is that the rate cutting cycle has started, says Herschel Jawitz, CEO – Jawitz Properties. “Added to this is the more than R3 per litre that petrol prices have come down by with another significant drop expected in October and the slowing of food inflation. Together, these will start to have a positive impact on disposable income and consumer confidence. We have already started to see more positivity and buyer activity in the residential market in anticipation of the interest rate cut. This trend is expected to continue.”
Today’s cut and further cuts will also begin to rebalance the rental/ownership decision-making in South Africa and have an impact on housing affordability both directly and indirectly, believes economist Associate Professor Francois Viruly.
According to the recent StatsSA Household Survey, the number of households renting has increased substantially.
If rates continue to come down, they would certainly impact the rental market, agrees Jacqui Savage, National Rentals Manager for the Rawson property Group.
“With homeownership becoming more affordable, some tenants may choose to move from renting to buying and this could result in a reshuffle in the rental market, with vacancies rising slightly as tenants transition into homeownership.”
* Vivian Warby is a property writer and executive editor. vivian.warby@inl.co.za