7% low interest rate | Here's how much you're saving on your bond in total

7% low interest rate | Here's how much you're saving on your bond in total

The South African Reserve Bank has cut the repo rate by 25 basis points to an all-time low of 3.5% taking the prime interest rate down to 7% - in order to give South Africans some much needed economic relief, while spurring an already favourable first-time buyer's market. 

The announcement was made on Thursday, 23 July. In total the rate been cut by 300 basis points in 2020 to help consumers deal with the impact of the Covid-19 pandemic. Previously two rate cuts were announced in May added to the cuts by one percentage point on 17 March after and a 1 % cut in April. 

'Boost in middle to upper price bands'

"Having already slashed the repo rate by 275 bps to soften the effects of Covid-19, the Reserve Bank had room to adjust the rate, given that the consumer inflation rate slumped to 2.1% in May - the lowest in almost 16 years (since September 2004). Furthermore, price pressures have been subdued for some time now, with the inflation rate at, or below, the midpoint of the 3-6% target for 18 consecutive months," says Dr Andrew Golding, chief executive of the Pam Golding Property group.

While welcomed, Samuel Seeff, chairperson of the Seeff Property Group says the Reserve Bank should be taking a more aggressive stance with deeper cuts to boost the economy and property market during this unprecedented economic recession. People are not spending and the economy is simply not moving. More needs to be done to give momentum to the economy and property market, he says further.

"From an overall residential housing market and Pam Golding Properties perspective, we've seen the meaningful reduction in the repo rate for the year to date having a positive impact on demand - particularly in the lower price band below R2 million, where we are experiencing a high uptake among first-time and other buyers and investors. However, we are also successfully concluding sales in the middle to upper price bands, especially from R2 million to approximately R5 million.

Apart from a pent-up demand as a result of the lockdown, home buyers are responding well, not only to the significantly reduced interest rates, but also to the opportunity to capitalise on the zero transfer duty payable on properties selling for up to R1 million. As a result, ooba reports that home loans extended to first-time buyers remained elevated at 54.7% in June.

SEE | Why a bond application to only one bank could cost you 1% more in interest 

'Realistic pricing' 

Seeff adds, "Buyers need to be mindful that while we are generally in a buyer's market, they must be realistic with their offers. Although there is good demand in the market, there are very few desperate sellers.

"Most sellers are prepared to wait for the right price. While we are seeing some discounts at the top end of the market, there is very little below R1.8m with only the odd serious seller giving nominal discounts. Buyers who are not adjusting to this may well be left disappointed.

An important aspect in the current market is that each area differs in outlook and how it is slanted towards buyers or sellers. While analysts and news reports provide insight into general trends, sellers and buyers should consult with local area experts about their particular area.

SEE | Here's why you should be ready to negotiate every offer to purchase 

'Bond application surge'

Encouragingly, financial institutions continue to demonstrate an appetite to extend credit to home buyers. Deposits continue to decline as a percentage of purchase price, according to ooba, with May (at 6.7%) and June (at 8.1%) the lowest percentages on record (series started in May 2007). Positively, applications for 100% bonds received by ooba surged to 67.5% in June, with an approval rate of 79.9% during the same month.

Golding says international buyers have also been taking advantage of the weaker currency.

'Buying cheaper than renting'

Herschel Jawitz, CEO of Jawitz Properties, says that the latest rate cut will provide some additional support for homeowners in terms of staying ahead of the debt curve and continues to offer the best buying opportunities for buyers in almost 20 years. The cumulative effect of the interest rate cuts has reduced monthly payments by almost 20% from where it was in March this year."

Jawitz says that 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. It remains to be seen whether this is pent up demand or whether there is a sense that this is the time to get into the market despite the health and economic challenges facing the country. This is especially true for first-time buyers and tenants. For tenants in the lower price ranges who are paying rent, the latest rate cut may mean that renting is more expensive than repaying a mortgage. 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," says Jawitz.

'Space for further rate cuts over the next 12 months'

While inflation may rebound in the months ahead, as a result of the rebound in international fuel prices, there is currently little price pressure in the economy due to demand destruction as a result of the lockdown. The Reserve Bank's initial GDP forecast of -7% in 2020 may well prove to be too conservative and may therefore be revised to show larger decline, thereby creating space for further rate cuts over the next 12 months - as will the fact that both consumer and business confidence are at, or near, record lows, while renewed load shedding and recent stricter lockdown measures will further depress economic activity.

"With national house price inflation continuing to decelerate, easing to 2.4% in June from 2.6% in the first quarter of 2020, we are optimistic that savvy home buyers and investors will continue to take advantage of the access to finance and value for money on offer in what is currently a buyer's market," says Golding.