Repo Rate & Recovery of the Property Market

Even if the repo rate remains the same, the scene has already been set for the recovery of the property market

The anticipated death of the property market from the impact of Covid-19 has clearly not materialised, and the property market is set for a solid year, even if the South African Reserve Bank (SARB) announces next week that the repo rate will remain unchanged.

“We have already seen five repo rate cuts since January and the current lending environment, with the prime interest rate at a historic low of 7%, means that it is already a great time to apply for a bond,” says CEO of BetterBond, Carl Coetzee. BetterBond’s application numbers for the past three months are well above pre-lockdown levels, and there was a 52% year-on-year increase in bond applications in August.

“But, should the Monetary Policy Committee decide to drop the repo rate by a further 25bps, taking the prime lending rate to a record low of 6.75%, the additional savings on interest and bond instalments will further stimulate market activity, especially for first-home buyers.”

The monthly bond instalment on a R1 million home, at 6.75% interest rate, will drop to R7 604, a saving of over R2 000 compared with the monthly bond repayments in January when the interest rate was at 10%. The savings on the interest paid on this bond over 20 years, at 6.75%, is a significant R491 000 explains Coetzee.

The table below shows how much a homeowner will save on the same bond amount, with the interest rate at 6.75% instead of at 10%. It also shows how the drop to 6.75% will affect the savings on interest over 20 years.

“A further repo cut, even if only a modest 0.25% drop, would go a long way towards stimulating the economy,” says Coetzee. But the good news for consumers is that even if the repo rate remains unchanged, there is still time to make the most of the lending environment. Even the SARB appears to be calling homebuyers’ attention to the current lending environment, with a recent social media post on housing stock including the following: “Hint for potential homebuyers: the prime rate is at a 54-year low now”.

The lending climate is set to prevail for a few months yet, and buyers would do well to make the most of the current interest rate before it changes. “Historically, we have seen that the SARB increases the repo rate gradually, so we are unlikely to see a drastic reversal of interest rate cuts in the immediate future. Also, the economy is not out of the doldrums just yet. The announcement this week of a GDP contraction of 16.4% from the first quarter, with a projected annualised reduction of 51% if the economy continues to underperform, means it would be prudent for the SARB to keep interest rates low to encourage spending and investment.”

The surprise turnaround in house price growth suggests that the lower interest rate is already having the desired effect, says Coetzee. FNB has reported house price growth of 1.4% year on year, and BetterBond has seen an increase in average house prices listed in bond applications across all price bands. “The lower interest rate is stimulating demand, which in turn is strengthening house prices, especially at the lower end of the market. Buyers are able to qualify for bigger bond amounts because of the lower interest rate, and it remains an ideal time to bond.”

REI Radio spoke to CEO of BetterBond, Carl Coetzee. Listen to the full podcast below: