Repo Rate remains unchanged at 8.25%, a boost for homebuyers

21 Sep 2023

The South African Reserve Bank's Monetary Policy Committee decided to keep the repurchase rate at its current level of 8.25% per year, with effect from 22 September 2023.

Stable repo rate a boost for home buyers

Having seen the Reserve Bank raise the repo rate by a total of 475 basis points between November 2021 and May 2023 - taking it to 8.25%, and with the current prime lending rate at 11.75%, today's announcement that the interest rate remains stable provides a welcome boost for home buyers and those with mortgage debt, says Dr. Andrew Golding, chief executive of the Pam Golding Property group.

Dr. Golding says: "During the above period, the consumer inflation rate has declined from a peak of 7.8% in July 2022 to 4.7% in July 2023 - marginally above the mid-point of the inflation target, and although inching slightly higher in August to 4.8%, it remains well within the inflation target range of 3-6%.

"With a recent Reuters poll revealing that 29 or the 30 economists surveyed predicted no change to interest rates this week, the poll also disclosed that the same economists are forecasting 75 basis points of cuts during the course of next year (2024), which would take the prime rate back to 11% by year-end.

"While the SARB governor continues to signal that the Reserve Bank is ready to hike rates further, if necessary, it seems likely that with inflation expected to remain within the inflation target during the remainder of the year (2023) and during the course of next year, the Bank has sufficient scope to leave rates unchanged and that the interest rate cycle has therefore peaked.

"It is widely acknowledged, however, that there are challenges to the inflation outlook, from a higher oil price, weaker rand, and the prospect of rebounding food prices - as a result of the El Niño effect and rising temperatures across the globe. And, of course, loadshedding remains a threat to local price pressures, as businesses are forced to burn more diesel as an alternative energy supply at a time of rebounding energy prices.

"Given the ongoing upside risks to the inflation outlook, the Bank may well not hike rates further but rather err on the side of caution by keeping interest rates higher for longer - in other words, cut interest rates later than some economists are expecting. Ultimately, however, the timing of interest rate cuts next year is likely to be determined by future economic and political developments both locally and internationally.

"We continue to take a positive view on the residential property market, and we are beginning to see the first encouraging, albeit modest, signs of an expected upturn in the market, particularly as we head into spring.

"Aside from extremely buoyant sales activity in our Boland and Overberg regions, which continue to benefit from ongoing semigration trends - coupled with the exceptional lifestyle, and ongoing steady activity in the Western Cape and KwaZulu-Natal, we are noting increasingly more favourable indicators in Gauteng, with purchasers taking a  view on the value for money on offer and deciding that now is the time to buy - including in the luxury market. This is aside from solid sales transactions concluded in other regions around the country.

Rise in average age of bond applicants

"An interesting statistic noted in our latest Pam Golding Residential Property Index, is the fact that the average age of bond applicants rose to a record high of 40 years in August 2023, which may be partly underpinned by a growing demand for investment or buy-to-let properties, which rose to 10.4% of total bond applications received by ooba last month.

"Also according to the Index the rebound in national house price inflation remains intact, rising from a cyclical low of 3.6% in January 2023 to 4.0% last month (August). House price growth in Gauteng of +2.9% is gathering momentum, lifting the national average to 4.0% last month, while growth in prices continues to slow in both the Western Cape (+4.7%) in KwaZulu-Natal (+2.0%). Notably, in the lower price band, below R1 million, house price inflation continues to gather momentum, rising to +8.2% in August."

No rate hike welcomed as stability vital in these uncertain times

The Reserve Bank keeping the repo rate unchanged at 8.25% (prime at 11.75%) is welcome news, and the correct decision for the economy and property market, says Samuel Seeff, chairman of the Seeff Property Group.

Stability is now vital for the economy. He says further that the Reserve Bank cannot possibly contemplate any further rate hikes. As it is, we have already passed a point of tolerance and can see the impact of the higher interest rate on the economy and property market.

It is exerting unnecessary pressure and essentially punishing consumers for something beyond their control. After three years of economic stress, we cannot endure any more. The economy needs a vital boost, and if anything, we would like to see a 25bps drop in November ahead of the retail season.

Seeff says the impact of the high interest rate has set the market back three years to the pre-pandemic levels, but now with a higher interest rate. After a cold and slow winter, the market would now be looking forward to a traditionally more active summer and a return of international buyers as a coastal boost.

First-time buyers and those looking to move closer to schools, or who want to semigrate to the Cape areas, are also likely to look to secure their property before the new year commences.

The upside for the market is that conditions remain particularly favourable for buyers almost across the board including most areas in the Cape. Although facing a higher interest rate, buyers can generally find a good deal, and if they can afford it at the current interest rate, they will benefit once the rate comes down again.

The downside for sellers though is that they will need to continue pricing according to current market conditions. With fewer buyers and more stock to choose from, buyers are setting the pace of sales. Properties are now taking much longer to sell, and serious sellers still holding out right now, may risk losing out.

Is there light at the end of the tunnel for SA's property market?

The Monetary Policy Committee announcement of zero change to the current interest rate has property owners around the country breathing a collective sigh of relief. General consensus from economists is that this announcement signals the end of the current rates hike cycle, which saw the prime lending rate climb a full 5% (from 7% to 12%) in the space of just two years.

"This has been an exceptionally tough time for South Africans, and property owners in particular," says Tony Clarke, MD of the Rawson Property Group. "Pegging interest rates at their current levels may be a more conservative approach than many hoped for, but it's definitely a step in the right direction for the property market."

Clarke says more significant relief is predicted towards the end of 2024, when interest rates are expected to begin a slow decline. "This outcome does rely on local inflation remaining within reasonable bounds, and no further hikes by the US Federal Reserve," he cautions, "but for now, all signs point towards stabilisation with a gentle downward trend starting around this time next year."

Subdued national house price growth

Interest rate stabilisation is good news for national house price growth, which contracted to a mere 1.1% in July (according to FNB's August Property Barometer report). This, together with slowing demand and affordability-driven downscaling trends, has led to a 3% decline in average bond figures (as estimated by FNB based on deeds data), and a 10.3% drop in transfer duty income compared to last year.

"It's been 14 years since the last time average bond amounts went down," says Clarke. "That goes to show just how severe this period of economic decline has been. We're hopeful that an ease in the interest rates hike cycle will renew market confidence while affordability recovers. This would help to rekindle property market activity and boost national house price growth over time."

Resilience in lower price brackets

According to Clarke, the upper ends of the property market have experienced the greatest downward price pressure.

"The more affordable price brackets have been relatively resilient," he says. "This is often the case, but is particularly noticeable at present due to increased demand from high-income households that are downscaling. Certain areas, like the Eastern and Western Cape, have also continued to outperform national averages."

Ongoing buyers' market conditions

In general, Clarke says market conditions strongly favour buyers - and are likely to do so for some time to come.

A recent FNB survey supports this view, revealing a 75% increase in the number of sellers having to drop their original asking price to secure a sale. (Actual price reductions have remained stable at around 10% of asking price, on average.)

"It's a difficult time for sellers, many of whom are having to adjust their expectations," says Clarke. "It's best if this can be done before entering the market, because overpricing is known to backfire on final sales prices. If you do go in too high, it's important to price-correct quickly to avoid alienating buyers or creating an undesirable impression."

An eye on the future

While interest rate stabilisation is a positive step, Clarke says it's early days yet for South Africa's property owners.

"Realistically, we're still in for a long period of relatively high interest rates and relatively low economic - and income - growth," he says. "That's not to say there aren't going to be some incredible property opportunities ripe for the picking. It just means we need to approach these with our eyes wide open, and our feet planted firmly on the ground." 

Stable interest rate in a highly competitive market welcomed

Tyson Properties' chairman, Chris Tyson, and chief executive, Nick Pearson, says although this means that the prime lending rate remains at a 14-year high of 11.75%, both Tyson and Pearson said that the decision not to further increase the repo rate would provide more stability for South Africa's property market and give the country's consumers some respite from the increasing cost of financing important assets like properties.

"Whilst it cannot be denied that South Africans still have to contend with a high cost of living, rising fuel prices and increased load shedding over the months of September and October, this latest decision by the Reserve Bank is definitely a move in the right direction. I foresee the rate being held now for the remainder of the year with, perhaps, even a slight drop in the new year," said Tyson.

"We find ourselves in a stable environment at present. The Reserve Bank's holding the interest rate for the past few months has already sparked renewed confidence. The group is performing well and our Johannesburg operation, in particular, has seen a resurgence in interest. The region had a record month in August with R111 315 000 in sales and rentals," he added.

Tyson said that, in addition to a more stable financing environment, this resurgence could be attributed to sellers being more realistic with their pricing their properties in what continued to be a challenging market.

"Since the interest rate has stabilised, Tyson Properties has registered some of its best months in the history of the company. We have seen buyers across the board express confidence in the market. There is renewed activity at the higher, middle and lower ends of the market," Pearson continued. 

He said that, should interest rates hold for the foreseeable future which was a strong possibility, Tyson Properties expected and welcomed a sustained surge in the market.

"We expect a busy summer. Another interest rate hold will give buyers far more peace of mind when it comes to property transactions. We expect to see more first-time buyers back in the market as well as an increase in the number of transactions under the R3.5million threshold," Pearson noted.

He said that although this latest repo rate decision did relieve some of the pressures of buying and selling properties, sellers nevertheless needed to continue to focus on ensuring that their properties were not only realistically priced but well-staged and presented in order to attract buyers in a still highly competitive market.

Buyer activity increases with rates on hold 

According to Herschel Jawitz, CEO of Jawitz Property, while rates are on hold, the same can't be said for petrol prices which are climbing so it a case of 'two steps forward on rates and one step backwards on petrol price and disposable income'.

When rates were increased by the shock of half a percent earlier in the year, there is no doubt that demand for property slowed noticeably which impacted on both volumes and prices growth. We have started to see some green shoots in terms of demand since the last MPC meeting where rates were kept on hold.

Buyer activity has definitely started to increase across all price levels over the last two months where we typically see some fall off in the winter months. Buyers may sense that the next step on rates, even if only well into 2024, is down and now is the time to buy.

Bank lending remains favourable with rate concessions on home loans averaging at half a percent below prime. In most parts of the country it will be a while before sellers start to see any real price growth in the market. In regions like Gauteng, as long as the supply of property exceeds demand at current levels, prices will remain soft. Even with CPI at 4,8%, house price growth is not expected to reach these levels in 2023 meaning that in real terms house prices will likely decline.

To keep interest rates stable is a reassuring outcome

With inflation dropping to 4,7% in July, most economists predicted that interest rates would hold steady at this meeting. "The decision to keep interest rates stable is a reassuring outcome that should go a long way towards instilling investor confidence in an improved economic outlook for the country," comments Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett.

This announcement will also have a positive knock-on effect on the South African property market. "High interest rates have made it challenging for homeowners to keep up with the repayments on their home loans. Year-to-date, we have already seen a 34% increase in the number of mandates received from the banks' distressed property divisions. By keeping interest rates stable, the MPC has at least provided homeowners some time to recover from the string of interest rate hikes we've experienced over the last year," he notes.

He adds that in terms of our economy, things are hopefully as bad as they will get for now. "All indictors seem to be pointing towards greater stability. If this is the case, then we should hopefully be heading into a period where inflation and interest rates will remain steady, which should also lead to a small drop in interest rates early next year," Goslett predicts.

Overall, Goslett remains cautiously optimistic about the future. "While it is always a good idea to have a back-up plan in case things take an unexpected turn for the worse, I think it is relatively safe to expect that we have likely seen the last of the interest rate hikes for a while now and that the situation can and will only improve from here," says Goslett.

Lew Geffen Sotheby's International Realty CEO Yael Geffen says she shares the country's relief that the MPC decided to leave the repo rate unchanged at 8.25% for the second consecutive meeting, but isn't quite ready to break out the champagne.

"The fact that two MPC members voted for an increase of 25 basis points on top of the Reserve Bank Governor's consistent caution about South Africa's economic position point to the inescapable conclusion that we're not quite out of the woods.

"It's likely that before the end of the year we'll see one further increase that will hopefully be no more than 25 basis points. The MPC meets again at the end of November, which doesn't bode well for the festive season.

"There's also no escaping the fact that South Africa's economy is very closely tied to America. Yesterday the Federal Reserve kept its rate unchanged as well, but indicated it expected one more hike before the end of the year. I expect we should brace for the same."

Geffen says this rate reprieve shouldn't be seen as licence for consumers to spend more.

"We need to be conservative and think about every cent. Belts are tight and they need to stay that way.

"Homeowners, especially, should save where they can and pump any excess cash available into servicing the primary debt on mortgages to bring down monthly repayments."

Property investors should double down on due diligence

High Street Auctions Director Greg Dart also welcomed the decision to leave the repo rate unchanged and at the at the same time, he warned that economic recovery would not happen overnight and that consumers could well see another interest rate hike before the end of the year.

"The Reserve Bank's job is to keep inflation under control, which is epitomised by the old saying about not being able to make a silk purse from a sow's ear. Given what the Reserve Bank has to work with right now, expecting an economic silk purse is an impossible ask.

"We saw annual consumer price inflation rising slightly to 4.8% in August from 4.7% the previous month, which while within the Reserve Bank's target range, is still assessed as a rising risk. Likewise, food price inflation remains high, and fuel and electricity prices are through the roof.

"In the property sector, industrial and retail are still strong. The Cape region in particular, is booming across the board.

"My advice to property investors right now is to double down on due diligence. Know where your money is going, and which sectors are delivering returns. The smart money isn't in speculation."