While the last Monetary Policy Committee (MPC) meeting left the repo and prime lending rates unchanged for 14 consecutive months, experts now believe that Quarter 4 of 2024 will hold a more buoyant outlook.
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Gavin Lomberg, CEO of ooba Home Loans shares that in the higher for longer interest rate environment, relief and intervention is needed. “We strongly believe that a rate cut will be the key to unlocking higher volumes of activity in upcoming months.”
And while a return to COVID-19-era historic low rates of 7% is unlikely to transpire any time soon, Lomberg adds that there is much speculation around a rate cut of around 25 basis points (bps) as early as next month. “The reasons for this centres around the moderating of local inflation – notably food and petrol prices – and the easing of US inflation.”
“And, as the country continues on the path towards an imminent rate cut, we anticipate a slow rise in homebuyer confidence, more competitive bids for homes and a steady return of first-time homebuyers to the property market.”
Unpacking rate cuts impacts
Lomberg further speculates on the positive impact that rate cuts could have on the market, and how these will impact the property sector:
1. What rate cuts could mean for buyers and sellers
“When rates do soften, we believe that homebuyer confidence will increase, resulting in stronger market activity and more competitive offers on homes,” shares Lomberg.
However, Lomberg does caution that it will take time. “While a 25-basis points rate cut will not solve all our problems, it does signal the start of the rate cutting cycle and is set to bolster confidence in the market.”
He adds that, “Some homebuyers tend to take a more cautious approach to home buying, so they might wait to see how the market plays out over the remainder of the year, prior to making a purchase. This is particularly evident among first-time homebuyers who are more rate sensitive.”
Overall, Lomberg believes that competition among homebuyers will spell good news for sellers. “In a prolonged buyer’s market, an upswing in demand could favour sellers in two ways: 1) more competition and more competitive bids on homes and 2) higher asking prices.”
“As it stands, we are seeing increased purchasing power from buyers aged 18 – 36 while homebuyers aged 37-years-plus are purchasing cheaper properties than they were last year,” shares Lomberg. “With this in mind, it will be interesting to see how each buying segment responds to rate cuts – particularly the 37-plus aged category which seem to be most affected by the increased cost of living and are now spending less on homes.”
Investment property continues to yield strong demand in South Africa, registering the highest quarterly average in Q2 ’24 (now at 12%) and Lomberg hopes that this will in fact ramp up as rates decrease.
“What will be most interesting to observe is the growing interest from Gen Z homebuyers for buy-to-let properties. In Q2 ’24, 9.2% of all applications received from buyers in this age group were for the financing of investment properties. This is significantly up on the 3.0% recorded in this category of property acquisition by Gen Z buyers in 2019,” says Lomberg, pointing to property as a wealth creation strategy that is being widely embraced by the younger generation.
“All-in-all, as interest rates drop and between first-time homebuyers, the influx of buy-to-let buyers and second-time homebuyers, we anticipate a gradual rebound in market activity – particularly in regions of key interest such as Western Cape and Gauteng.”
2. Impact of rate cuts on first-time homebuyers – especially Gen Z’s
According to ooba Home Loan’s latest data (Q2 ’24), first-time homebuyers currently make up 46% of its customer base – down by 10% from its peak in May 2020 when interest rates reached a historic low of 7% and first-time buyer applications peaked at 56%.
“Based on this downward trend, it’s clear to see that first-time homebuyers are feeling the effects of a higher for longer interest rate environment and the rising cost of living,” says Lomberg.
However, should the predicted rate cuts be implemented, Lomberg expects this trend to reverse with first-time homebuyers being some of the first to respond.
“The idea of homeownership certainly appeals to first-time homebuyers, especially the incoming generation of purchasers – Gen Z who have in fact registered a 30% increase in the average purchase price paid over the past five years (aged 18 – 25),” notes Lomberg.
Comparing the higher volume (49.1%) applications received from first-time homebuyers in Q1 ’23, when the prime lending rate was 50 bps lower (11.25%), to the current low application levels shows the impact that even a half a percentage point rate difference can have on deterring would-be homebuyers.
