Residential property sector weighs in on the first rate cut for 2024 | Everything Property
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Residential property sector weighs in on the first rate cut for 2024

ooba Group CEO Rhys Dyer

CEO of ooba Group Rhys Dyer says the residential property sector has welcomed the revised prime lending rate of 11.50% and repo rate of 8%.

Following a 16-month long hold, the South African Reserve Bank (SARB) announced a 25-basis points interest rate cut on 19 September, 2024. Rhys Dyer CEO of ooba Group welcomed the decision, adding that it is the first step towards market recovery and marks the start of a series of upcoming rate cuts. Here he unpacks several positive factors that bolstered South Africa’s economic outlook.

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Dyer says that the residential property sector has welcomed the revised prime lending rate of 11.50% and repo rate of 8%, with the announcement expected to mark the beginning of a series of upcoming interest rate cuts.

“Several positive factors bolstered South Africa’s economic outlook, enabling the September rate cut and securing a projected total of 50 basis points (bps) in total before the end of the year.”

Dyer points to the May 2024 elections, the easing of inflation, petrol price cuts, a long loadshedding hiatus and the US Federal Reserve rate cut as catalysts for this month’s long-awaited rate cut, and unpacks these trends as follows:

Key factors that led to the interest rate cut

1) The GNU formation

“The May 2024 elections kickstarted positive change following a few tumultuous years. The formation of the newly established GNU was met with a positive reaction from financial markets, reflecting optimism on the progress of the long-awaited structural reforms which are much needed.”

By the end of August the rand had rallied to a 13-month high against the US dollar amidst improved investor sentiment towards South Africa and a weaker US dollar as markets began to discount lower US interest rates.

“The stronger rand combined with weaker global oil prices has led to four consecutive monthly reductions in the local petrol price, bringing it back to levels seen at the beginning of the year. These cuts not only reinforce the downward trend in local inflation but also provide much-needed relief to household finances,” he adds.

2) Easing of inflation

Lower inflation continues to pave the way to a healthier economy as Dyer explains, “Local inflation has declined faster than anticipated to the SARB’s 4.5% target rate following the easing of food and energy prices. In August, headline inflation declined to 4.4% while core inflation (excluding food and energy prices) had fallen below the Bank’s target at 4.1%. Both are now well below the 4.5% target.”

Central to the MPC’s decision making, the Bureau of Economic Research (BER)’s Q3 ‘24 inflation expectations survey confirmed a continued easing in inflation expectations, with analysts, businesses and trade unions expecting inflation to average 5.1% this year versus 5.3% in the Q2 ‘24 survey. Thereafter, all three groups expect inflation to average 4.8% over the next five years (versus 4.9% in Q2 ‘24).

“With the inflation rate now falling below the Bank’s 4.5% target, real (inflation adjusted) interest rates have risen to an 18-year high – creating an overly restrictive monetary policy stance and ample scope for the SARB to continue cutting interest rates.”

3) US Federal Reserve leads the way

“Another positive for the local interest rate outlook centred around the continued easing of US inflation coupled with job market cooling,” says Dyer.

Following a 23-year high, the announcement of half a percentage-point rate cut in the US yesterday signals the start of plans to implement a total of 100 bps in rate cuts before year-end; with a total of 200 bps in cuts forecast for the current easing cycle.

“With US interest rates set to decline at a faster pace than local interest rates, the rand is likely to retain its recent recovery, helping to contain imported price pressures,” adds Dyer.

4)  Goodbye loadshedding – for now

Dyer adds that the impact of 175-days free from loadshedding can also not be underestimated. “While loadshedding has hampered economic growth and our investment outlook for years, the relief experienced in 2024 has provided some much-needed recovery.”

He does however stress the need for modest hikes in the electricity price. “Electricity prices have risen sharply over the past 15-years at an average growth rate of 10.5% per annum – outpacing water tariffs, property rates and food. Significant increases such as these have had a major impact on households, many of whom are already under immense financial pressure.”

Property market poised for recovery

Dyer points to ooba Home Loan’s data which shows clear trends in subdued home loan application demand. “Compared to the 2020 homebuying frenzy when the interest rate was at a historical low of 7%, more recent data shows that rising interest rates and the increased cost of living has hampered progress among both first and second-time homebuyers. However, the banks continue to drive activity by softening deposit requirements and providing competitive discounts to the prime lending rate.”

He highlights Q2 ‘24 data in which ooba Home Loans achieved a higher discount in the prime lending rate for their customers (now at prime less 0.57% on average), an improvement from the prime less 0.41% on average in Q2 ‘23.

“Another good news story which could bode well for future rate cuts is the introduction of the two-pot retirement system,” says Dyer.

“While it’s too early to say for sure, it is estimated that between R20 billion and R100 billion will be withdrawn over 2024/25, providing a minor positive boost to real GDP and contributing to tax revenue. Some analysts speculate that up to half of those funds will be used to reduce debt burdens while others believe that the bulk of the funds will be used for discretionary spending as consumers work to alleviate accumulated debt over extended periods.”

Excited about the future

Dyer is excited by the prospect of what is to come. “We firmly believe that rate cuts will stimulate activity in the first-time homebuying sector which has proved to be the most rates sensitive segment in the market. We also believe that the relief – albeit small – is the beginning of improved financial health for existing and prospective homeowners,” he says.

“Even in tough times, homebuyers continued to prioritise deposits and as their financial picture begins to change, we expect to see deposits on home loans reaching new highs” he concludes.

Ooba Home Loans Prime lending rate

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