Good news for South African homeowners

The combination of lower interest rates and major banks’ increasing lending is set to significantly boost the local property market.

The head of Standard Bank Home Services, Toni Anderson, recently said that South Africa’s residential property market has faced significant headwinds from elevated interest rates and banks’ reduced lending appetite. 

However, this is all set to change soon, with demand for residential property picking up and banks looking to increase lending in this space in anticipation of interest rate cuts. 

The South African Reserve Bank has been in a rate-hiking cycle since November 2021, increasing rates by a cumulative 475 basis points since then.

This has brought the repo rate to 8.25% and the prime lending rate to 11.75%, which naturally affected the country’s property market.

Anderson explained that, as interest rates climbed to cool off inflation, the home loans sector experienced a sharp decline, echoing buyers’ cautious sentiment and creating muted growth across the real estate landscape. 

However, the tide is set to turn as many experts predict that the Reserve Bank will start cutting rates at its next meeting in September.

While the cutting cycle is set to be relatively shallow, this will still bring much-needed relief for South Africans.

Bloomberg recently reported that South Africa’s real interest rate is at the highest level in 18 years, meaning the central bank may consider lowering borrowing costs by 50 basis points at least once this year.

The publication said traders are pricing in a reduction of about 30 basis points in September.

This “suggests that the street doesn’t really want to gamble on a 50 basis point September starter just yet, but isn’t ruling it out and gives some chance to that outcome”, Robert Hoodless, the co-head of FX and macro analysis at InTouch Capital Markets, told Bloomberg.

Lower borrowing costs may ease the strain on households, lift consumer confidence, and boost economic growth in a nation where gross domestic product has expanded by an average of less than 1% over the past decade.

SARB Governor Lesetja Kganyago has repeatedly said the Monetary Policy Committee (MPC) would only be comfortable lowering interest rates when inflation eases sustainably toward the midpoint of its target range, 4.5%.

The latest inflation print came out at 4.6% after months of decline, which led many to believe that the September meeting could see South Africa’s first rate cut in about 3 years.

In addition, after months of subdued demand for home loans and other forms of credit, South Africa’s biggest banks are noticing an uptick in demand. 

This comes on the back of lower inflation and anticipated interest rate cuts, boosting consumer confidence and willingness to take on debt. 

In its latest interim results, Standard Bank said it had seen the peak in terms of its credit loss ratio at 92 basis points and bad debt, with it expecting lending to pick up in the second half of the year. 

Early delinquencies have begun to decline, and the growth of non-performing loans has slowed. 

In an interview with Daily Investor, Standard Bank CEO Sim Tshabalala said the bank had never shut its taps, explaining that it had applied the same criteria to all clients across the past two years. 

What has happened is that consumers have come under increasing financial pressure and can no longer meet affordability criteria. 

“Furthermore, other players have come back to the market and they have been undercutting in price. Our approach to this is that after the point where this becomes uneconomic for us, we do not extend credit.”

“The summary of my point to you is that we never shut the taps. We were simply applying age-old principles of banking, and we stood by our clients now when you turn them to the health of the consumer.” 

Capitec CEO Gerrie Fourie also told Daily Investor that the bank has started opening its taps again. Previously, the bank said it would only reopen if the economy starts to grow.

Now, Fourie explained that green shoots appearing in the country’s economy has enabled the bank to open its taps again.

Aside from interest rate cuts and increased lending, Anderson said another reason to be optimistic about the local property market is to look at the long-term trends. 

Historically, the residential property market has always shown resilience and recovery after significant downturns. 

Anderson said South Africa’s political landscape stabilised quicker than many expected post-elections with the Government of National Unity. 

Coupled with the rand’s recent strength, there is potential for renewed economic stability, which may boost consumer confidence. 

Given the fundamentals, Anderson said one can reasonably expect a rebound in South Africa’s residential property market in the medium to long term.