Recent rate cuts shave over R1.5k off a R1m bond – but is it enough?

Recent rate cuts shave over R1.5k off a R1m bond – but is it enough?

The fourth interest rate cut of 2020, as announced on Thursday by the South African Reserve Bank Monetary Policy Committee, presents a mixed-bag for the property industry. 

The 50 basis point interest rate cut brought the cumulative repo rate reduction in the current interest rate cutting cycle to 3 percentage points (starting in July 2019), Thursday’s cut being from 4.25% to 3.75%. This takes Prime Rate lower from 7.75% to 7.25%.

On the one hand it is good news for consumers, but it could be even better news for those who have been renting for a long time and are looking to become homeowners. The scales of monthly budgets could be at a tipping point where it might become cheaper for those renting to buy. 

SEE: How much you can save on your home loan after lending rate cut to 50-year low

However, even with rates at 50-year lows, it is not expected to provide any meaningful property demand boost.

The current deep recession now puts business confidence at multi-decade lows, the support from interest rate cutting comes more in the form of financial relief for current property owners, which can be important in curbing the extent of growth in property supply on the market, by slowing the rate of financial pressure-related property selling by businesses, says FNB economist John Loos.

Here’s what home-owners can expect to pay as the latest 50-basis point rate cut comes into effect, bring the interest rate on home loans down from 7.75% to 7.25%. It also factors in the previous rate cuts earlier this year, and look at the savings over the typical bond term of 20 years.

SEE: SA’s major banks on home loan approvals as Covid-19 Lockdown levels eased

Bond amount9,75%8,75%7,75%7,25%Monthly Saving from 9,75% to 7,25%Interest Saving Over 20 Years
 R    250 000,00R2 371R2 209R2 052R1 976R395R94 884
 R    500 000,00R4 743R4 419R4 1053 952R791R189 769
 R    750 000,00R7 114R6 628R6 1575 928R1 186R284 653
 R 1 000 000,00R9 485R8 837R8 2097 904R1 581R379 538
 R 1 250 000,00R11 856R11 046R10 2629 880R1 976R474 423
 R 1 500 000,00R14 228R13 256R12 31411 856R2 372R569 307
 R 2 000 000,00R18 970R17 674R16 41915 808R3 162R759 076
 R 3 000 000,00R28 456R26 511R24 62823 711R4 745R1 138 614
 R 4 000 000,00R37 941R35 348R32 83831 615R6 326R1 518 153
 R 5 000 000,00R47 426R44 186R41 04739 519R7 907R1 897 690
 R 6 000 000,00R56 911R53 023R49 25747 423R9 488R2 277 229

 (Source: Better Bond)

READ: Virtual property transactions | The new normal in real estate

‘Slowing of financial pressure-related’

Loos says despite the very significant interest rate reductions, visible signs of a commercial property demand “jump” taking place that could be ascribed to interest rate reductions – are not expected. 

“The Bank sees no significant inflationary pressure build up at present, with its CPI inflation forecast of 3.4% for 2020 being near the lower limit of the 3-6% target range.” 

He says the economic shock has dented already-weak business confidence so severely that few will be looking to take advantage of rate cuts to purchase property.

‘Trading volumes to be expected to be lower than in 2019’

“Any increase in property demand later in 2020 will merely be the effect of the country coming out of lockdown, and normal property trading being possible once again. But we would still expect total property trading volume for 2020 to be significantly lower than 2019, and new mortgage lending also experiencing a significant decline for this year compared to 2019.

A forecast drop of -7% in the MSCI All Property Value/Square Metre Index in 2020 is “not be a sufficient valuation decline to restore the demand-supply balance during this year” leading to an oversupplied market in the near term.

“Our expectations are based on the perception that the Commercial Property Market is influenced to a great extent by economic growth conditions and Business Confidence, and while the SARB forecasts low inflation, justifying major rate cuts, it also forecasts a -7% contraction in GDP (Gross Domestic Product) for 2020 (The FNB forecast being an even more severe -8%).”

SEE: Housing sales drop drastically due to Lockdown, urgent call to reclassify

Loos says, “In short, the 300 basis points’ worth of interest rate cuts in the current interest rate cutting cycle has likely provided significant support for the property market, and the SARB macroeconomic model suggests more rate reduction is possible. However, in this severe recession, the stimulus impact will go largely unnoticed, overshadowed by the negative recession impact.

“Interest rate cuts will not likely be a meaningful property demand stimulus at the current time. Their impact is more one of relief for current property owners, curbing the level of property supply that could be driven onto the market by financial pressure. It is thus on the supply-side (containing supply growth) of property where their role may currently be more meaningful for the property’s market’s balance.”

‘Investors could be in the pound seat’

Despite the harrowing impact on the economy, rate cut conditions continue to favour those who are financially stable.  Long-term tenants wanting to own their own homes are, of course, not the only potential beneficiaries, according to Carl Coetzee, BetterBond CEO.

“Investors looking to expand their portfolio by way of a property purchase could also be in the pound seats, with affordability improving across all price bands. As always, however, property must be viewed as a long-term investment – not something to be snapped up in haste, for short-term gains. Its reputation as a resilient asset class is based on a commitment over time.

“A functioning property sector can help to unlock income and liquidity for a whole host of role-players along the entire value chain. These include, but are not limited to, banks and bond originators, property developers, real estate agents and conveyancing attorneys. This will help stimulate economic activity and generate taxable income that could, in turn, help turn the wheels of the fiscus again,” says Coetzee.

‘Allow full trade in real estate’

Commenting on the MPC’s rate cut of 50 basis points, Lew Geffen Sotheby’s International Realty CEO Yael Geffen says, “National regulations that force our doors to remain closed when other professional services have been permitted to resume trading is irrational and a vast number of realtors simply won’t recover. 

Geffen says the MCP is correct, though, noting in its statement that monetary policy alone can’t improve the growth potential of the economy or reduce fiscal risks.

“The MPC said clearly that there should be an implementation of ‘prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation’ and that falls squarely to government.

“As a nation we clearly need a responsible approach to managing the current pandemic, but not at the expense of the entire economy. If the government doesn’t open more economic doors now, such as allowing trade in the real estate sector which has a value chain GDP contribution of 6%, there eventually won’t be a country left to save.

“Our citizens need to work, they need to feed their families and they need roofs over their heads. For those things to happen, we need a working economy and we thank the MPC for taking a large step today towards making that a reality.”

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