First-home buyers and savvy investors looking to take advantage of the most conducive lending environment in decades will be the biggest winners if the South African Reserve Bank (SARB), as many expect, announces an interest rate cut of at least 25 basis points this week.
This would bring the repo rate to a record low of 3.5%, meaning that for many, at a prime lending rate of 7%, the bond repayments on a home would be cheaper than the monthly rental for the same property, says Carl Coetzee, CEO of BetterBond. "For example, the average monthly rental in the formal market is about R7 800, and the monthly bond repayment for a R1 million property would be slightly less at around R7 750."
While a homeowner will incur additional costs, such as rates and taxes, a straight comparison of bond repayments with the monthly rental suggests that owning a home may actually be more cost-effective. Also, the benefits of owning an appreciating asset that serves as a long-term investment far outweigh paying off someone else's bond each month with rental payments. This is especially true if you also take into account that current interest rates are resulting in considerable savings on your bond repayments over 20 years.
Four cuts since the beginning of the year - a total drop of 2.50% in the interest rate - has already gone some way to stimulating the property sector. A further drop would assist in driving buyer activity as the property market recovers from the impact of the pandemic and lockdown restrictions, says Coetzee. "We have seen encouraging volumes of bond applications, with the number of applications for July to date up 33% year-on-year. While this could still be the after-effect of pent-up demand, the recent rate cuts are most certainly also a factor."
If the SARB does announce a fifth interest rate drop this week, it will provide an added incentive for first-home buyers. There's no doubt that the current lending climate, which has made it easier for first-home buyers to qualify for a bond, at a more affordable interest rate, has pushed up this demand. "Bond applications from first-home buyers accounted for 70% of BetterBond's applications for the past year to date, up significantly from the 60% received during the same period last year," says Coetzee.
Furthermore, BetterBond's average approved bond size is just under R1 million, suggesting that the bulk of sales activity is at the lower end of the market. Almost 45% of BetterBond's formal grants for July year-to-date, were in the R500 000 to R1 million price range, followed by 19% for homes between R1 million to R1.5 million. Interestingly, for July there has been increased activity in the R2 million to R2.5 million market, with an almost 4% year-on-year increase in applications for homes in this range, despite reports that the upper end of the market was showing signs of muted activity. It could be that the record-low interest rate is making it increasingly possible for buyers across price bands to qualify for a bond.
The current lending climate has created the ideal opportunity to consider property as a viable long-term investment option, encouraging a shift away from renting. Even if the SARB decides to keep the repo rate steady at 3.75%, current interest rates are still at the lowest they have been in over 50 years. As CEO of a popular international agency in Southern Africa, says: "For those who can afford to do so, there really has never been a better time to enter the market than right now. I would just advise buyers to leave room in their budget for if and when the interest rates return to pre-lockdown levels."