The South African Reserve Bank’s Monetary Policy Committee (MPC) decided to leave interest rates unchanged this month, having already lowered the repo rate by a cumulative 3% so far this year.
This leaves the repo rate at 3.5%, with further cuts unlikely in the near term, and the prime lending rate at 10%. The prime and base home loan rate remain at a historic low of 7.0%.
Marcél du Toit, chief executive of residential property platform Leadhome, said the decision to keep interest rates unchanged was ‘baffling’, given the need for radical economic recovery in the country.
At the same time, the local property market was being held back by an overly cautious approach by the major banks.
Leadhome’s data showed a clear shift in the interest rates granted by banks on home loans pre- and post-lockdown, said Du Toit.
In Q1 2020, 54% of home loans granted were below the prime interest rate.
After 1 June, this was turned on its head, with only 27% of home loans being given interest rates below prime – meaning nearly three-quarters of home buyers in this period are paying prime or above.
“This means one of two things: either banks have fundamentally repriced the long-term risk of lending in South Africa, or they are taking advantage of the existing liquidity offered by the SARB to increase margins and take profits. Banks will always argue the former, but the evidence right now suggests the latter,” said Du Toit.
Dr Andrew Golding, chief executive of the Pam Golding Property group, said that the MPC’s decision was not entirely surprising, as the 300 point rate cuts for the year to date are still taking effect, given the fact that the economy was in lockdown during Q2, and with restrictions not yet fully lifted.
With inflation currently just 3.2%, near the lower end of the 3-6% target range, there was the possibility of a further reduction in the repo rate in order to provide relief for debt-laden consumers.
As the economy has largely reopened, lower rates are now likely to have more impact by easing debt burdens for households and businesses, and it is hoped that we will see an additional reduction in the repo rate at the next MPC meeting in November.
Making the case for a further lowering of the repo rate is the limited Q3 recovery in South Africa’s economy which highlights consumers’ hesitance and limited ability to spend, with the return of load shedding casting a further shadow, while there is as yet no real sign of meaningful economic reforms or stimulus, resulting in both consumer and business confidence remaining severely constrained.
There are many potential recovery scenarios currently being touted as possible for both the economy and the residential property market.
A true V-shaped recovery appears doubtful as the property market is unlikely to enjoy a fully sustained recovery in the absence of an economic recovery and accompanying employment creation, while a double-dip or W-shaped recovery also seems improbable as activity in the market is not expected to weaken to the same extent as during the strict level 5 lockdown, said Golding.
“More likely appears to be a Nike ‘swoosh’ recovery, which refers to a sharp downturn as we have experienced, followed by a slow, gradual recovery, which would also require a recovery in economic activity.”
It is clearly too early to pronounce on this but we have seen some tentative signs of recovery such as the Reserve Bank leading indicator, albeit that this is coming off a very low base.
“A further suggestion and possibility is the so-called ‘square root’ recovery, which would be a sharp downturn, followed by a sharp upturn and then a sustained period of stability,” said Golding.
We could optimistically hope for a recovery somewhere between the two scenarios above, he said.
In the residential property market currently, while particularly the middle and lower sectors of the market are still fuelling activity, the luxury market is also experiencing green shoots of increasing transactions, the property specialist said.
First-time buyers continue to boost sales, representing 54.5% of Ooba’s home loans in July, while the trailing effective bond approval rate rebounded to 82.2% in July and is rapidly approaching levels seen in the months before lockdown, said Golding.
He said that the approval rate for pre-qualified buyers of 91% and 79% for non-qualified buyers continued to recover in July, with the pre-qualified rate now back to pre-lockdown levels, citing Ooba.
“Positively for home buyers, the average deposit as a percentage of purchase price remained relatively low at 8.2% in July, still close to May’s record low of 6.7% (Ooba’s series started in mid-2007), while 100% bond applications stood at 63.2% in July, with an approval rate of 81.7% in the same month.”