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Repo rate cut welcome reprieve for consumers, homeowners

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Interest rate cut is expected to drive residential property demand

This week’s repo rate cut is expected to drive residential property demand in the country and give consumers and homeowners a welcome breather ahead of the VAT increase next week.

Property players say the Reserve Bank decision to reduce the repo rate will also, eventually, lift average house price growth.

Although the cut from 6.75% to 6.5%, and the base home loan rate from 10.25% to 10%, was largely expected, Samuel Seeff, chairman of the Seeff property group, says the Monetary Policy Committee’s decision will provide “much-needed stimulation” for the market, and will be an “energy boost” to encourage buyers and investors. 

In addition, following higher living costs as a result of the 1% VAT increase on April 1, the reduction is a “welcome reprieve”. He says the cut is a great incentive for hesitant buyers to invest in property.

Prior to the announcement the residential market remained “sluggish” with sales volumes tight and property price growth flat, says Herschel Jawitz, chief executive of Jawitz Properties. However, while the cut will “certainly give buyers more food for thought”, it will be some time before the imbalance between supply and buyer demand translates into better price growth.

“Improved consumer and business confidence will continue to be the key driver in the recovery of the residential market.”

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He says the rate cut translates to a decrease of R170 per month on a R1 million bond over 20 years.

The reduction will, however, be a once-off this year, believes FNB property economist John Loos. Nonetheless, this, together with already-improved economic growth, will assist in driving mildly stronger residential property demand and lift average house price growth closer to 5% this year. Last year’s average growth was 3.8%.

Mortgage lending rates are likely to remain just above 10% so the rate reduction is unlikely to cause unwanted over-exuberance in the housing market. It will have a “minor direct impact” on consumers as it will lower monthly repayments on household debt. 

Loos says it also has potential to further improve consumer and mortgage lender sentiment.

Re/Max of Southern Africa called the decision “a small victory”, with regional director and chief executive Adrian Goslett “applauding” the decision. With the VAT increase set to take effect next month, a lowered interest rate also alleviates some financial strain consumers are bound to face.

“Shrewd citizens will use this opportunity to save for future investments, or reroute the money they’re saving into their bond repayments.”

The property market can expect a “very healthy surge”, agrees Greeff Christie’s International Real Estate chief executive Mike Greeff.

“Any type of easing in interest rates will encourage individuals to get involved in the property sector. It will also bring relief for current bondholders because it could either create additional disposable income, or it will allow for a higher than required bond repayment which can take years off a bond.” 

Greeff says a lower interest rate is also a positive for the banking sector, as because it will create an influx of customers applying for home loans.

This announcement, together with Moody’s decision to not only leave South Africa’s credit rating unchanged at one notch above junk status but to upgrade the outlook from negative to stable, are positive factors which should provide welcome stimulus for the residential property market, says Dr Andrew Golding, chief executive of the Pam Golding Property group.

“With Moody’s decision, another cloud of uncertainty has been lifted from the local economic landscape.”

These reassuring developments should be seen in a positive light by investors, says Richard Hardie, Knight Frank Residential manager for the Atlantic Seaboard, City Bowl, and Hout Bay.

“It shows a general positive move for South Africa, and it is also reflected in the strengthening of the rand, which will encourage property investment from both local and foreign buyers.”

Harcourts Africa chief executive Richard Gray says creating favourable conditions for investors and buyers to enter the market is a priority, and an environment conducive to financial and economic positivity ensures there are more entrants from a larger diversity of backgrounds.

“In addition, for those who are already active in the market, this translates into higher investment returns and a far-reaching trust in the country’s economic stability.”
Gray also predicts an increase in consumer confidence and real estate demand over the short- to medium-term.

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