How recent interest rate cuts are alleviating post-pandemic inflation in the property market

While the current interest rates are still more than double what they were during the pandemic, the ongoing reductions signal to the property sector that post-pandemic inflationary pressures are easing and that the South African Reserve Bank (SARB) is actively encouraging investment. 

On Thursday, the Reserve Bank’s Monetary Policy Committee (MPC) cut the interest rates, dropping by 0.25%, taking the repo rate to 7.25% and the prime lending rate to 10.75%.

They anticipated that those who adopted a wait-and-see approach over the past year, delaying home purchases or portfolio expansions, would now view this as a favourable time to commit, according to Dr Farai Nyika, an academic at the Management College of Southern Africa (MANCOSA)

He said that in addition to the monthly savings on instalment payments resulting from lower interest rates, landlords are also feeling optimistic.

“The previous tightening cycle since the pandemic had placed significant pressure on renters (who are heavily indebted), and the current environment offers some much-needed relief, and it will be easier to collect rentals,” Nyika said. 

He said that they also anticipated an expansion in property construction and an increase in rental stock coming online over the next year, driven by improved credit extension to investors resulting from lower interest rates-particularly in the Western Cape.

“That province’s property market has proven to be highly resilient despite the rate hikes of recent years. However, the current rate cut will not necessarily lead to rental increases below the inflation rate.

"This is because demand for property in the Western Cape remains intense, fuelled by the province’s desirable lifestyle, quality of services, and growing interest from digital nomads who compete with locals for housing. In short, we foresee a mini property boom over at least the next two years.” 

With regards to other provinces, Nyika said they expected greater stability, especially in the Eastern Cape and KwaZulu-Natal.

He said these provinces face distinct challenges - outmigration in the Eastern Cape, which puts downward pressure on house prices, and natural disasters in KwaZulu-Natal.

“Lower interest rates will certainly support ongoing rebuilding efforts in KwaZulu-Natal following the floods experienced over the past three years.”

The property sector also received this rate cut as a welcome boost, particularly as many municipalities have announced their annual tariff and rate hikes.

The property sector will welcome the news of a resumption of the Reserve Bank’s rate-cutting cycle; however, the 25 basis points reduction indicates that the prime rate remains significantly higher than it was before Covid, when inflation levels were also elevated, according to Dr Roelof Botha, an economist and advisor to the Optimum Investment Group.

He said the BetterBond Index of home loan applications remains much lower than before the restrictive monetary policy kicked in at the end of 2021.

“A significant percentage of residential property sales are related to owners who cannot afford the sharp increase in the debt service costs/disposable income ratio, which is still 33% higher than at the beginning of 2022. The past three years have witnessed a relentless rise in the prime rate (via the repo rate), despite the complete absence of demand inflation,” Botha said. 

He said that with the current real prime rate (prime minus inflation) at a level of 156% higher than the average during the tenure of Gill Marcus, the previous Governor of the Reserve Bank, it is clear that the buyer’s market will remain intact in the property sector.

Interest rates will have to be lowered faster and more aggressively before a meaningful recovery can be expected in the property market, he added. 

The economist warned that unless the economy manages to recoup the loss of 245 000 jobs that occurred in the first quarter of this year, it would be tantamount to self-inflicted economic sabotage if the MPC does not continue with its rate-cutting cycle, which he said is progressing at a snail’s pace.

The benefit to the property sector is gradual, as a significant portion of South African debt is hedged at high rates, with the full earnings benefit materialising when interest rate swaps or caps mature and are renewed at lower rates, according to Ridwaan Loonat, a senior analyst for Property at Nedbank.

“The SARB has also implicitly announced its preference for a 3% inflation target. If this target is reached, then this could potentially see another 125bps of cuts in this cycle. We forecast another 25bps cut in July 2025,” Loonat said. 

The Monetary Policy Committee’s (MPC) decision to cut interest rates was largely anticipated and underscores a greater emphasis on domestic fundamentals, according to Siphamandla Mkhwanazi, a senior economist at FNB.

He said inflation remains below the bottom of the inflation target range and high-frequency data reflects a weak start to 2025 from a productive sector perspective, which will be worsened by faltering global prospects.

He added that ultimately, the macroeconomic outlook is benign, providing ample space for a continued cutting cycle. 

“That said, the impact of heightened uncertainty on investor confidence and capital flows will likely continue to drive gyrations in capital and currency markets, exacerbating external vulnerabilities and keeping the South African Reserve Bank (SARB) cautious.

"Furthermore, South Africa’s difficult fiscal trajectory is delaying any improvements in sovereign risk and borrowing costs. The outlook on interest rates will continue to reflect these risks.

"Should muted local inflation, and expectations that the Fed will resume its cutting cycle before year-end prevail, our current view that another 25bps cut is probable this year would be supported,” Mkhwanazi said.  

The MPC's decision to cut the interest rate by 25 basis points is a welcome relief for consumers and is expected to bolster homeowner sentiment, according to Nondumiso Ncapai, the managing executive at Absa Home Loans.

She said the recent Absa overall homeowner sentiment index showed a slight decline in the overall homeowner confidence by 2 percentage points to 85% in the first quarter of this year.

“This rate cut is expected to improve affordability for current and aspiring homeowners; however, consumers’ finances remain strained in the short term, with time needed for consumers to gradually recover financially.

"Absa’s baseline view is for one further interest rate cut of 25bp at the July MPC however, the ongoing global policy and economic uncertainty will remain top of mind for the MPC,” Ncapai said. 

Nyika said it is still a bit early to say with certainty what the outcome of the next MPC announcement will be in three months.

At this stage, he said he was undecided on whether there would be a further interest rate cut or if rates would remain unchanged. He said this uncertainty stemmed from two main factors: US President Donald Trump’s global tariff hikes and the future of the African Growth and Opportunity Act (AGOA).

“The tariff increases could have a deflationary and potentially recessionary impact on the global economy. If that materialises, the South African Reserve Bank may opt to cut rates further to support a weakening economy.

"Additionally, if South Africa loses its AGOA status within the next three months, the Reserve Bank may also be prompted to cut rates in response to the resulting economic strain. However, if neither of these scenarios occurs, I expect interest rates to remain unchanged.

"Governor (Lesetja) Kganyago is generally regarded as hawkish, so I would not be surprised," Nyika said.  

Independent Media Property