Not enough to ‘cancel out the deleterious effect of the recession, which has been exacerbated by Covid-19’. South Africa’s interest rate is at its lowest level in seven years, but don’t expect lower interest rates to turn the property market around just yet.

Image credit: Shutterstock

Image credit: Shutterstock

That’s the view of Kobus Lamprecht, head of research at Rode & Associates, in the latest Rode Report on the South African Property Market (Q1:2020), published this week. “The interest rate cuts of 2020 will be slight support − but by far not enough − to cancel out the deleterious effect of the recession, which has been exacerbated by Covid-19,” he says in the report.

“Usually, interest rate cuts will encourage consumers to take on new debt,” adds Lamprecht. “However, given the very dismal economic outlook, especially now with the coronavirus crisis, …it would be wiser for consumers to use this opportunity to keep their repayments on their existing debts up to date or to save for when interest rates rise again.”

He says many people have seen their financial ability to purchase property reduced considerably due to the crisis, especially those unable to work during the three-week lockdown and those invested in the equity market. The South African Reserve Bank (Sarb) slashed its repo rate to commercial banks by 100 basis points in March – the biggest single cut in years and the first consecutive cut by Lesetja Kganyago since he became bank governor in 2014. Sarb’s Monetary Policy Committee (MPC) cut the repo rate in January by 25 basis points.

With the repo rate now at 5.25%, the prime lending rate is at 8.75% – its lowest level since late 2013. According to Lamprecht, the rate is now close to the lows of the early 1970s. “Interest rates were lowered to provide support to the economy and the cuts were made possible by subdued local inflation and a worldwide trend of very accommodative monetary policy. Real interest rates (after inflation) are still quite high, which leaves room for further easing if required,” he points out.

More rate cuts

During the recent MPC announcement on March 19, Kganyago indicated that further rate cuts could be on the cards this year and in 2021. “The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicated three repo rate cuts of 25 basis points each, in the second and fourth quarter of 2020, as well as in the third quarter of 2021,” he said.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19. Our decision and its magnitude seeks to do this in the near term. Monetary policy however cannot on its own improve the potential growth rate of the economy or reduce fiscal risks,” added Kganyago.

According to Pam Golding Properties, the recent 100-basis point interest rate cut will see homeowners with a R1-million mortgage saving around R648 per month, as calculated by ooba. On a R2=million mortgage, a monthly saving of R1 296 can be expected.

Meanwhile, Lamprecht notes in the latest Rode Report that South Africa’s housing market remains under pressure, with national house price growth continuing to slow in the first quarter of 2020. “National house prices, as measured by FNB, grew by 3.1% in nominal terms in February 2020 compared to February 2019. This implies that prices have continued to decline in real terms, after adjusting for building-cost inflation,” he says.

With regards to the buy-to-let residential flat market, he points out that vacancy rates increased to 6.1% in the first quarter of 2020, from 5.5 in the fourth quarter of 2019. “High flat vacancy rates have led to slower rental growth, which averaged 3.8% on a yearly basis in the fourth quarter of 2019. This implies that rentals rose at roughly the same rate as consumer inflation, but lower than building-cost inflation,” notes Lamprecht.

“Flat vacancy rates will likely rise more in the short term as the shrinking economy, now aggravated by Covid-19, puts significant financial pressure on many tenants. A positive for the oversupplied market is that new completions are slowing, while developers are also planning to build less,” he says.

Source: Moneyweb