Buying a home is a long-term commitment, especially as it involves a bond that could take upwards of 20 years to repay. During the first few years that a bond is in place, the repayments are in fact covering the cost of the loan's interest, so it is at this early stage of the relationship that the prime lending rate is of particular importance.
We have seen the South African Reserve Bank (SARB) cut the repo rate by an aggressive 300 basis points since January, largely in response to the impact of Covid-19 on the economy. The drop to the current prime lending rate of 7% has been a major driver of the residential property market’s unexpected recovery, with FNB saying it looks set to outperform the commercial property sector for the first time since 2014. Even if the repo rate holds steady this week, when the Monetary Policy Committee meets again, the groundwork has been laid for solid growth over the next few months.
New grants are at a 10-year high, says the South African Reserve Bank, and for the first time in decades, it may now be more affordable to buy a property than to rent one of the same value. A household with a monthly income of R30,000 will spend almost R2,000 less on a bond of R1m at the current prime lending rate of 7% than they would have spent in January when prime was at 10%. The SARB says the number of new mortgages in September jumped by almost 10,000 this year compared with the 21,697 recorded in September last year.
Buying a house 30% more affordable
The surge, says the SARB, can be attributed to the “lowest prime rate in 55 years” which has made buying a house 30% more affordable. BetterBond’s bond application volumes, up considerably compared with pre-lockdown figures, attest to this. But perhaps the greatest success story of the current repo rate cycle is the impact it has had on the first-home buyer market. More than 70% of BetterBond’s applications in recent months have been first-home buyers - people who would otherwise have been unable to afford a bond.
Carl Coetzee, CEO of BetterBond
But, as the saying goes, all good things eventually come to an end, and this is especially true with domestic interest rates that go up and down at the behest of a myriad economic factors. Five consecutive repo rate cuts this year have done well to stimulate the economy, and inflation fell below the 3-6% target range in May and June, and is now projected to return to the 4.5% midpoint over the next two years. Although the economy is only expected to return to 2019 levels of output in three years’ time, according to the SARB, there are signs of a modest recovery.
Interest rate trajectory
Fortunately, the SARB historically favours a gradual increase in the repo rate, and its two-year projections suggest that we can expect the first upward movement only towards the end of 2021. This is good news for buyers, says the SARB, as it means that rates are not expected to be back to pre-crisis levels before the end of 2022. But surely it would be more helpful for prospective buyers to have a longer view of South Africa’s interest rate trajectory, especially as the first few years of their bond repayment is when the interest rate has the greatest impact?
With this in mind, it would be more useful if the SARB gave a longer forecast, like the five-year outlook offered by other central banks. This would enable buyers considering a 20- to 30-year bond to time their application to coincide with the favourable interest rate. Being more informed, they could also choose to pay extra into the bond to reduce the cost of repayments later when the interest rate could be higher.
Having a five-year interest rates forecast would enable buyers to make even better choices, creating more opportunities within the property market. Buying a home is an emotional decision, and one with a wide-reaching impact. It requires a long-term view, based on extended forecasts that will ensure this long-standing relationship will be rewarding and sustainable - for the buyer and the property market as a dynamic sector of the economy.
It’s the crystal ball consumers need now, more than ever.
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