Interest rate drop to add to property rebound, with reports of 'record breaking activity'

Globally, conditions are expected to remain unpredictable during the current Covid-19 pandemic. Accordingly, the South African Reserve Bank has stressed once again that in “this highly uncertain environment, future decisions will continue to be highly data-dependent and sensitive to the balance of risks to the outlook.”

This follows another 25 basis points cut to the repo rate, which brings the prime lending rate to 7% - boding well for a rebound of the hard-hit South African property market.

'Level 3 rebound lift'

The market went from a multi-year market contraction straight into the chaos wreaked by the coronavirus pandemic. While experts were cautiously optimistic for a market recovery post-lockdown, the economic crisis, unprecedented unemployment levels and reduced consumer spending promised a long and slow return to healthy growth.

After a long period of not being able to finalise any property transactions, we were all hopeful for a small rebound when lockdown restrictions on real estate lifted.

The momentum has shown no sign of slowing. So far, July has been even busier than June, suggesting that the rebound is only just getting started.

'Uptick in the luxury property market' 

The boost inactivity isn’t limited to major centres. 

Transactions in all regions and price bands picking up proportionally. Even the luxury market – typically the first to suffer during times of economic and political uncertainty – shows an uptick in activity compared to averages over the last year.

Our busiest market segment is still the under R1 million price bracket, which made up around 42% of our sales this June. The R1 to R2 million range is our next most popular, making up 38.4% of June’s sales, with the higher price brackets comprising the rest of the month’s transactions.

As for the reasons behind the surge in market-wide activity, Clarke says the unprecedented combination of low-interest rates, increased lending and excellent value for money on offer all play a role.

'Move form renting to owning a no-brainer'

These historically low lending rates opens up the real estate market to a massive number of first-time buyers who would not previously have been able to afford their own homes.

This is extremely positive news and it’ll add impetus and confidence at a time when the country needs it most. This is an investors’ paradise, savvy investors are taking advantage and so they should.

It effectively means a monthly repayment of less than R7 800 a month on bond of R1 million, which makes the move from renting to owning a no-brainer. Why would you pay someone else’s bond if that’s what you could pay to own your own home?

It’s a buyer’s market in South Africa right now, prices are down across the board and despite the uncertainties that we face because of Covid-19, in real estate terms buyers haven’t have a market this good in decades.

We’ve already seen significant movement in the market since the real estate sector reopened from lockdown and another rate cut is just the shot in the arm the sector and buyers need. 

'Payments reduced by 20%'

The cumulative effect of the interest rate cuts has reduced monthly payments by almost 20% from where it was in March this year.

Despite the state of the economy, bank lending continues to remain positive in terms of approval rates and loan to values.

Overall, the market conditions remain firm and there is no doubt that the market has seen better than expected buyer and tenant activity post-lockdown than expected. This is especially true for first-time buyers and tenants. Despite the rate cuts and positivity we are seeing in the market, there is the reality of the COVID-19 economy. The key will be consumer and business confidence, which are both at record lows.

Income stability still an issue

According to Investec analysis, the lift in global economic activity is likely to exceed SA’s economic recovery in both speed and pace. Many structural weaknesses remain domestically, while the ongoing weak ability of SA to meet the electricity needs of an economy growing at over 1.0% y/y will be a key limitation to economic recovery.

The Reserve Bank projects the economy to now contract by 7.3% in 2020, versus the 7.0% estimated at the previous MPC meeting, with widespread job losses anticipated as businesses continue to close or downscale.  GDP is then forecast to lift by 3.7% y/y (3.8% May forecast) in 2021 and 2.8% (2.9% May forecast) in 2022.

The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicates one repo rate cut of 25 basis points in the fourth quarter of 2020, remaining unchanged in the first quarter of 2021.

Affordability is still an issue from an income stability perspective,” says Clarke, “but those with steady employment and a good financial track record can get extraordinary bang for their buck these days. Foreigners, too, are finding great value in South African property, with the weaker rand creating unbeatable opportunities for those with stronger currencies.  

All things told, there has seldom been a better time to invest in property. It’s heartening to see South Africans recognising this opportunity and getting in on the action. They’ll certainly be reaping the rewards if this rebound continues as dramatically as it has so far.

Courtesy of Property24