Unchanged Repo Rate at 8.25% - Eases Burden for Homebuyers

The Monetary Policy Committee of the South African Reserve Bank has made the decision to maintain the repurchase rate at its current level of 8.25% per annum, effective as of September 22, 2023.

Steady Repo Rate Benefits Homebuyers

In the wake of a series of repo rate hikes, totalling 475 basis points from November 2021 to May 2023, bringing it to 8.25%, and with the current prime lending rate standing at 11.75%, the recent announcement of an unchanged interest rate provides a welcomed respite for homebuyers and individuals burdened with mortgage debt.

During the mentioned period, consumer inflation has seen a decline from its peak of 7.8% in July 2022 to 4.7% in July 2023, hovering slightly above the mid-point of the inflation target range. Despite a minor uptick to 4.8% in August, inflation remains well within the acceptable range of 3-6%.

While a Reuters poll indicated that the majority of economists foresaw no interest rate changes this week, they also predicted a potential 75 basis points reduction in the prime rate over the course of the following year, potentially bringing it down to 11% by the end of 2024.

Despite hints from the SARB governor regarding the possibility of further rate hikes, the prevailing outlook suggests that, given the expectation of inflation staying within the target range for the rest of 2023 and into the next year, the central bank has room to keep rates unchanged, potentially signalling the peak of the interest rate cycle.

However, it is important to acknowledge potential challenges to the inflation outlook, such as rising oil prices, a weaker rand, and the possibility of increased food prices due to factors like the El Niño effect and global temperature rises. Additionally, the issue of load shedding continues to loom, potentially putting upward pressure on local prices as businesses resort to more expensive alternative energy sources amidst surging energy prices.

Considering these inflationary risks, the bank may opt for caution, delaying interest rate cuts beyond expectations. Ultimately, the timing of future rate cuts in the next year will likely be influenced by economic and political developments, both domestic and international.

Positive Trends in the Residential Property Market

Despite these uncertainties, a positive outlook persists for the residential property market. Encouraging signs of a market upturn are emerging, particularly as we enter the spring season. Notably, the Boland and Overberg regions are experiencing robust sales due to ongoing migration patterns and attractive lifestyle offerings. The Western Cape and KwaZulu-Natal continue to maintain steady activity, and positive indicators are also appearing in Gauteng, with buyers increasingly recognizing the value for money in the current market.

Notably, the average age of bond applicants reached a record high of 40 years in August 2023. This may be influenced by growing interest in investment or buy-to-let properties, which now constitute 10.4% of total bond applications.

While national house price inflation rebounded from its low point of 3.6% in January 2023 to 4.0% in August, the growth varies across regions. Gauteng is leading the way with a growth rate of +2.9%, contributing to the national average. However, price growth has slowed in the Western Cape (+4.7%) and KwaZulu-Natal (+2.0%). In the lower price segment, below R1 million, house price inflation has gained momentum, reaching +8.2% in August.

Stability Preferred Over Rate Hikes

The decision to maintain the repo rate at 8.25% (with prime at 11.75%) has been welcomed as the right choice for both the economy and the property market. Stability is crucial in these uncertain times, and further rate hikes are deemed undesirable, given the strain already placed on consumers due to previous increases.

The high-interest rate environment has set the market back, equivalent to three years before the pandemic, but with elevated interest rates. As winter ends, the market anticipates increased activity in the summer season and the return of international buyers to coastal areas. First-time buyers and those seeking properties close to schools or contemplating a move to Cape areas are also expected to act before the new year.

For buyers, the current market generally presents favourable conditions, albeit with higher interest rates. However, they stand to benefit when rates eventually decline. Sellers, on the other hand, must price their properties according to the current market dynamics. With fewer buyers and increased inventory, properties take longer to sell, and sellers who delay adjustment to market realities risk losing out.

A Glimpse of Hope for the Property Market

The announcement of an unchanged interest rate by the Monetary Policy Committee provides relief for property owners. Economists generally believe this marks the end of the recent rate hike cycle, which raised the prime lending rate by 5% over two years.

Although a conservative approach, maintaining interest rates is seen as a positive step for the property market. However, substantial relief is not expected until late 2024, when interest rates may begin a gradual decline. This depends on local inflation staying in check and no additional hikes from the US Federal Reserve. Still, signs point to stabilization with a possible downward trend in about a year.

National house price growth has been subdued, with a mere 1.1% increase in July. Slowing demand and affordability-driven downsizing have led to a 3% drop in average bond figures and a 10.3% decline in transfer duty income compared to the previous year. The property market is hopeful that the easing of the interest rate hike cycle will boost confidence and support the recovery of property market activity, ultimately leading to national house price growth.

Resilience in Lower Price Ranges

Lower price brackets have demonstrated relative resilience in the property market. Affordability has driven demand, especially from high-income households downsizing. Some regions, such as the Eastern and Western Cape, continue to outperform national averages.

Buyers' Market Conditions Continue

Market conditions remain favourable for buyers, with sellers often needing to adjust their asking prices to secure sales. While actual price reductions have been stable at around 10% of the asking price, sellers should avoid overpricing and promptly correct prices to attract buyers in the current competitive market.

Looking Ahead

Although interest rate stability is a positive development, it remains crucial for property owners to exercise caution. South Africa is expected to endure an extended period of high-interest rates and limited economic and income growth. Nevertheless, opportunities in the property market can still be found, with careful consideration and realistic expectations.

Stability in a Competitive Market

The decision to maintain the repo rate at 8.25%, despite its 14-year high, brings much-needed stability to South Africa's property market and offers consumers some relief from the rising cost of financing assets like properties. While economic challenges persist, this decision is seen as a step in the right direction, with hopes of a slight rate reduction in the new year.

A Stable Environment for Growth

The stable interest rate environment has sparked renewed confidence in the property market. Regions like Johannesburg have experienced a resurgence in interest, with record-breaking sales and rentals in August. Buyers are gaining confidence across all price levels, and with the expectation of rate stability, a busy summer season is anticipated, including more first-time buyers and transactions below the R3.5 million threshold.

Sellers' Need for Realistic Pricing

While the repo rate decision provides some relief for buyers and sellers, those selling properties should continue to price them realistically. With a surplus of properties and fewer buyers, sellers should remain mindful of market conditions and be prepared for longer selling periods.

The Path Forward for the Property Market

The decision to maintain interest rates brings a sense of relief to property owners. It is expected to instil investor confidence and offer homeowners a chance to recover from the impact of previous rate hikes. While challenges persist, indicators suggest greater stability on the horizon, potentially leading to a modest rate reduction in early 2024.

Cautious Optimism

Despite ongoing uncertainties, cautious optimism prevails for South Africa's property market. With the worst of interest rate hikes likely behind, there is hope for a more stable period ahead. However, financial prudence and preparedness for unforeseen events remain advisable.

Focus on Due Diligence for Property Investors

Property investors are advised to focus on due diligence in their investment decisions. Understanding where investments are going and identifying sectors with promising returns is crucial. Speculation should be approached with caution, and the emphasis should be on informed investment strategies.

Conclusion

In conclusion, the decision to maintain South Africa's repo rate at 8.25% offers much-needed stability to the property market and relief to homeowners burdened by rising interest rates. While challenges persist, including inflationary risks and economic uncertainties, there is optimism for a gradual market recovery in the coming year. Buyers can benefit from favourable conditions, but sellers must adapt to market realities. Cautious optimism prevails, emphasizing the importance of informed investment strategies and financial prudence in these uncertain times.