Repo Rate holds steady at 8.25%, homeowners breathe a sigh of relief
20 Jul 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 21 July 2023.
Unchanged repo rate the correct decision, and a welcome reprieve
The decision by the Monetary Policy Committee to keep the repo rate unchanged at 8.25% (prime and base home loan rate 11.75%), is a welcome reprieve for the economy and property market, says Samuel Seeff, chairman of the Seeff Property Group.
It was the correct decision given that inflation has, against expectation, been coming down rapidly over the last three months to 5.4% in June and is now within the Bank’s 3%-6% target range. The Rand-Dollar rate has also strengthened.
Consumers, homeowners and buyers have had to absorb enough rate hikes now, Seeff says further. The interest rate is already too high and has been stymieing economic growth and driving unemployment and higher debt levels. The higher interest rate has done more harm than good. The bank should now be looking at lowering the interest rate.
Along with electricity and other hikes, the burden on consumers, homeowners and buyers has been simply too high. The higher interest rate has also driven down property sales volumes even in the Cape market, which has been strong.
The market is now challenging for sellers and first-time buyers. The upside though, says Seeff, is that we are now undoubtedly in a buyer’s market. The effect is that sellers will now really have to focus on pricing accurately to attract buyers.
For buyers, this could be one of the best times to buy with prices trading relatively flat while the banks are still lending, albeit that buyers must now budget for the higher interest rate. Seeff says it feels similar to the period before the 1994-elections and the 2008-Global Financial Crisis. Those who had bought prior in 1993 or 2006/7 with the perceived risk at the time, subsequently benefited greatly from good capital growth which followed.
Encouraging news for existing and aspiring mortgage holders, says Dr Andrew Golding
With inflation easing to 5.4% in June, significantly down from 6.3% in May and now comfortably within the Reserve Bank’s 3-6% target range, the Monetary Policy Committee was well justified in holding the repo rate steady at this week’s meeting, says Dr Andrew Golding, chief executive of the Pam Golding Property group.
“This is indeed encouraging news for existing and aspiring mortgage holders. Consumers, especially those with mortgages and other debt, will no doubt be breathing a collective sigh of relief at the announcement, which hopefully heralds a shift towards a stable repo rate and the start of a downward repo rate cycle in 2024. The Reserve Bank itself recently conceded that interest rates at current levels are restrictive, fortunately, however, it appears that inflation has turned a corner.
“Keeping the repo rate steady is particularly motivating for aspiring, first-time home buyers, whose appetite for home ownership remains consistent, while the banks continue to offer attractive pricing, with the first-time buyer mortgage approval rate ticking higher to 81.2% in June - according to ooba’s statistics. Coupled with this, the demand for buy-to-let investment properties continues to surge, rising to +10.9% of all ooba mortgage applications in June (2023), which is a positive indicator for the housing and rental markets. Furthermore, ooba reports that the average weighted rate of concession below prime improved marginally in June, easing to -0.42%.
“Earlier this week, prior to the MPC’s announcement, many analysts made a compelling case that the MPC had done enough to contain price pressures. Demand is weak, making it hard to pass on additional costs, and rates have already been hiked by 475bps to the highest levels in 15 years – all this at a time of subdued levels of economic activity. Considering the fact that the prime rate has risen from 7% to 11.75%, the economy and those with debt are under pressure.
“With sentiment a key driver of the residential property market, a stable interest rate is what is needed to further boost confidence and activity. Positively for homeowners, and according to the latest Pam Golding Residential Property Index, the tentative rebound in national house price inflation continued in June 2023, rising from a cyclical low of 3.75% in January 2023 to 3.98% last month," says Dr. Golding.
Source: Lightstone
Dr. Golding says notably, in the lower price band below R1 million, house price growth continued to gather meaningful momentum at +7.6% above year-earlier in June. Another standout statistic is the steady widening of the coastal price premium (within 5km of coastline) to +4.6% in Q1 2023. This is due to the fact that although the revised coastal house price inflation rate has clearly peaked, non-coastal HPI is losing momentum.
Source: Lightstone
"Also of interest is that sectional title HPI has gathered steam, rising to +2.9% in June and thereby exceeding freehold HPI (+2.5%in June) for the first time since late-2004.
"From an investment perspective, statistics from the Pam Golding Residential Property Index reveal that smaller, two-bedroom, freehold house prices have rebounded by +4.6% in June, while smaller, two-bedroom, sectional title HPI continues to increase momentum by +3.4%. Meanwhile, larger, three-bedroom, freehold homes have seen HPI slow to 1.9%," he says.
"While we continue to experience solid activity in high-demand locations and key nodes around the country, including the major metro areas, and sought-after, luxury destinations, we are optimistic that the decision to keep the repo rate on hold will help boost activity in the residential property market in general," says Dr. Golding.
Unchanged repo rate a boost for the property industry in South Africa
Yael Geffen, CEO of Lew Geffen Sotheby’s International Realty, has hailed the unchanged repo rate as welcome relief for consumers and a boost for the property industry in South Africa.
“Ten successive rate hikes have hurt the market, and it shows particularly in the drop in first-time home buyers – those under the age of 35.
“Lightstone data released last month showed that property transfers (of properties transacting for more than R20 000) to buyers below the age of 35 over the past ten years have declined from 87 675 (45%) in 2012 to 81 519 (40%) in 2017 and 69 304 (38%) in 2022.
“This is the population segment of investors that should be growing – our home owners of the future. When young buyers can’t afford to get a foot on the property ladder, it shows an economy that’s in trouble.”
Geffen says while the unchanged prime lending rate announcement is extremely good news, the country is far from out of the woods.
“We need the government and the Reserve Bank to work harder to affect a real and lasting economic turn-around. Food price inflation is still too high, the cost of electricity is huge and grid instability is a grave threat to the country as a whole.
“This announcement is a good starting point, but we need prime lending rate stability for the remainder of the year, at least, and for the other currently dysfunctional moving parts to be fixed.”
Interest rates finally stablise
Some good news for debt holders. This ends the consecutive hiking cycle that started in November 2021.
Pleased by this announcement, Regional Director and CEO of RE/MAX of Southern Africa, Adrian Goslett says that an increase might have been in the cards, especially following the latest employment stats from the USA that were announced earlier this month and sent shockwaves to local stock markets.
“This news comes as a welcomed relief. Usually, when the USA’s employment rates increase, their inflation rates can be expected to increase, which in turn will lead to interest rate hikes. If the USA raises their rates, South Africa usually will too otherwise our rates become less attractive and investors become more likely to withdraw their funds from the country which would only put further pressure on our economy. While the USA has started to get their inflation under control, it is still uncertain whether enough has been done to convince the Fed to ease on interest rates,” Goslett explains.
Regardless of what has happened in the USA, Goslett states that many were unsure of what would happen with local interest rates because South Africa had only just hit the MPC’s inflation target range of between 3-6% a day before this announcement occurred, with StatsSA publishing the June inflation stats at 5,4% on 19 July.
“The fact that the MPC hasn’t raised interest rates at this meeting should afford debt holders more time to adjust to their higher repayment amounts. The one consolation for debt holders is that once our inflation is fully under control, we should hopefully enter into a period of greater stability. If you take a more historical view on the stats, as soon as inflation hits the MPC’s target range, interest rates become much more stable. Homeowners can take some solace in this because it indicates that, barring external factors, interest rate hikes are far less likely to occur within the near future.”
Pause on interest rate hikes welcomed
Tyson Properties CEO, Nick Pearson is just one of many in South Africa who are breathing a sigh of relief following this afternoon’s announcement by the Reserve Bank Monetary Policy Committee that it would pause the ongoing spate of interest rate hikes over the past two years.
Sensitive to the fact that household budgets are getting ever tighter and that the market is more subdued than it was at the beginning of the year, Pearson says it made sense for the Reserve Bank to allow heavily indebted South Africans time to reassess their financial situations going forward.
However, he says that while South African’s can celebrate, they also need to be realistic.
That said, he says this latest interruption in a steady progression of interest rate hikes is just one of many positives that suggest things are beginning to take a turn for the better.
Economic indicators that include dips in the Consumer Price Index (CPI) and Producer Price Index (PPI) and the oil price suggest some degree of normalisation as does a stabilisation of the rand, albeit at a low level. There are also indications that the international economic recession is flattening out even though there is not yet any sign of a peace treaty in the Ukraine.
During the first half of 2023, Pearson says the market has adapted to interest rate hike but has not stalled.
Although the market remains quiet with an increase in distressed sellers and a drop in home loan applications, it now favours buyers and there are still plenty of investors out there looking for a good deal. In fact, in this hugely speculative market, buyers now have more choice and should realise greater value, Pearson says.
He points out that many sectors are recovering – especially the tourism sector with South Africa identified as the best place to visit by readers of the UK’s Telegraph newspaper. An influx of retirees from the UK and Europe who are investing in a better standard of living, more temperate climate and good private healthcare also indicate that investing in property will continue, he adds.
Tyson Properties’ chairman, Chris Tyson, says property remains a sound investment, especially for first time buyers who are likely to get more value for their hard earned rands at a time like this.
Tyson acknowledges that those that have been hardest hit by the protracted interest rate hikes are at the lower end of the market. The particularly low interest rates during the Covid pandemic which lured many buyers into the market were unrealistic and he does not envisage interest rates dipping drastically or reaching such low levels again.
In light of this, Tyson advises new buyers to be proactive and work closely with their real estate agents to factor in at least one more interest rate hike and to account for a higher level of interest rates going forward.
He also suggests that property owners who are struggling to meet the repayments on their loans approach their banks to agree to more affordable payment terms rather than find themselves in debt and face the possibility of losing their homes.
“Now, more than ever, those selling properties need to realise that the market is extremely competitive and that they need to ensure that their property is correctly, and realistically, priced. Those most likely to sell their homes and realise the right price are those that are prepared to go that step further and ensure that they are well staged and in a sale ready condition. A desperate and disorganised seller will be the loser,” he says.
Buyers need to make sure they are sale ready as staging could help increase the sale price by up to 20% on average and sell three to 30 times faster.
This relieves South Africa’s already embattled consumers, who are facing skyrocketing costs across the board, says Leonard Kondowe, Finance Manager for Rawson Finance
"Inflation has slowed over the course of May and June to fall within the upper limits of the SARB’s inflation target for the first time in over a year," says Kondowe. However, global inflation and the weak rand also play an important role in the MPC’s interest rate decisions. “As such, it’s unlikely that we will see monetary policies easing until things are looking more positive on these critical fronts. That could take some time, judging by current conditions," says Kondowe.
Advice for homeowners
For South African homeowners, this means a potentially long road ahead.
“Bond repayments have risen faster on previous rate hikes which have been higher than anyone expected, and salaries haven’t come close to matching those changes” says Kondowe, “That has put a lot of homeowners under unexpected – and growing – financial pressure. My best advice, under the circumstances, is to focus on reducing unnecessary spending, avoid taking on new debt, and follow a strict monthly budget.”
Where simple budgeting will not suffice, Kondowe recommends approaching home loan providers to discuss debt restructuring options.
“Lenders are very open to compromises that will help protect their investments,” he says. “Don’t be shy to approach them and discuss options. At best, you’ll find a mutually beneficial solution. At worst, you’ll walk away with a better idea of what your next steps should be.”
Advice for sellers
Those who need or want to sell a property in the current market will need to play their cards wisely.
“There are definitely buyers out there – we’re helping them get prequalified and approved for finance all the time,” says Kondowe, “but the market is competitive and sellers need to be smart about pricing and marketing their properties professionally.”
Advice for prospective buyers
As for buyers, Kondowe says lenders are hungry for qualified bond applicants, competing against one another to secure new clients. That said, finance offers are not quite as favourable as they have been, with the majority of offers falling at or just below prime.
“As always, the stronger your financial profile and larger your deposit is, the better your offer is likely to be,” he says. “It is possible to secure a bond of 100% to 105%, but this is seldom the best financial decision. If it was me, I’d err on the side of affordability to future-proof my investment, making sure my monthly repayments were at least one or two percent below my maximum affordability.”
Unchanged repo rate is the best news
High Street Auctions Director Greg Dart says, the unchanged repo rate is the best news South African consumers and the property industry has received in more than 18 months.
“An 11th successive rates hike would have been a step to far for South African consumers already battling extremely high food prices and an electricity price increase at the beginning of the month that put substantial pressure on already tight household expenditure.
“In an interview earlier this week Finance Minister Enoch Godongwana said the Reserve Bank would base its prime lending rate decision today on what was necessary to curb inflation. Thankfully, the latest figures from Stats SA were good.”
On Tuesday, Statistics SA reported that consumer price inflation had slowed dramatically to 5.4% in June from 6.3% in May. This is the first drop below the Reserve Bank’s maximum target of 6% since April last year.
Dart says the currency’s performance has also improved, although this has more to do with a cooling of the US dollar than a strengthening rand.
“The ideal is to find a balance between curbing inflation and not squeezing the life out of the population with untenably high interest rates.
“Today’s announcement was a very positive step in the right direction, but a first step only.
“Mortgage holders need time to recover from the economic backslide they’ve faced since the upward rates cycle started in 2021, which means we need to see the prime lending rate remain stable for the remainder of the year.”
