How property buyers can use interest rates to their advantage in South Africa
South African investors who buy property at the current high interest rates could reap significant rewards once rates start declining, which could happen later this year.
“Given that interest rates are likely to start entering a downward cycle later this year, augurs well for home buyers and investors,” said Carol Reynolds from Pam Golding Properties.
“If you can secure an investment now and get the numbers to work within your budget at the current interest rates, then the advantage of seizing the opportunity to purchase now before house prices start increasing is that as soon as the cycle turns, you will reap the rewards of the declining interest rates and enjoy greater profitability.”
Many areas are still characterised as a buyer’s market, meaning that South Africans have a good selection of properties to choose from.
That said, buyers should be careful that they don’t over-capitalise, ensure that they have enough funds to cover maintenance while the property stands empty, and seek high-demand areas with low supply.
“If you are looking to acquire an investment property, location and rental returns are the most important factors,” said Reynolds.
“In a good location, you will enjoy capital growth and also benefit from sound returns. However, if you invest in an area that is not very appealing nor well-positioned, you could find yourself with very little appreciation over time and low demand from tenants.”
“If you are purchasing an apartment, invest in a good, solid apartment block with healthy financials and a well-managed body corporate.”
Interest rate question marks
That said, economists and analysts are divided on whether South Africa will see any rate cuts in 2024.
Sentiment on an interest rate cut this year has dampened, with inflation staying above the South African Reserve Bank’s target midpoint of 4.5%.
Bartosz Sawicki, market analyst at Fintech Conotoxia, said that these price pressures will continue to support the SARB’s hawkish stance, leaving South Africa as one of the only emerging markets that will not see a rate cut in 2024.
FNB is more optimistic about a rate cut this year but admits that there are several risks.
“While we foresee food inflation softening towards the middle of the year, there is a likelihood that lower yields following hostile weather conditions will revive price pressures,” said Koketso Mano, FNB Senior Economist.
“Furthermore, heightened tensions in the Middle East could weigh on oil supply, posing an upside risk to fuel and logistical costs.”
“The rand is also adversely affected by hawkish monetary policy rhetoric in the US.”
FNB said that this will keep stickier-than-expected inflation and the expectations of the US Federal Reserve cut being pushed back could keep interest rates at current levels for longer.
However, Nedbank’s economists are more optimistic, predicting cuts in September and November, as the sticky inflation figure of 5.3% in March and amplified risks stemming from the adverse turn in the global landscape will see the SARB maintain its hawkish tone.
Thus, the bank saw no reason to change its interest rate forecast, with expectations of two 25 basis points cuts later this year.
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