While two more rate cuts are possible, the monetary policy alone cannot be expected to improve the economy, says South African Reserve Bank Governor Lesetja Kganyago.
The South African residential property market is seeing the most impact from the historically low interest rate of 7% – with the favourable lending environment boosting buyer confidence, especially among first-home buyers and within the lower price bands of the market.
Ewald Kellerman, Absa’s Chief Risk Officer for Home Loans says over the last 6 months, “45% of its approved home loans have been for first-time home buyers (FTHB)”.
“The activity in the market has increased significantly due to favourable interest rates,” says Kellerman who also noted “FTHB applications for 100% lending has increased in comparison to the previous year”. Buyisile Maseko, Growth Head at FNB
Home Finance says “despite the pandemic, industry-wide data shows bourgeoning home buying activity, with the volume of mortgage applications reaching multi-year highs.” Household Mortgage Advances have shown early signs of acceleration as the Residential Property Market is set to outperform the Commercial Property sector for the first time since 2014, according to FNB industry analysis.
“Year-to-date, applications volumes are approximately 9% above the same period in 2019. We are however seeing a lag in approvals, as lenders apply caution amid an uncertain economic outlook, only outpacing 2019 levels by approximately 1.5% year-to date. In our view, activity is shored up by lower interest rates, attractive market pricing, lower transfer duties and the changing housing needs due to the pandemic.” Samuel Seeff
chairperson of the Seeff Property Group notes their approval rates are still at over 80% and that their data shows “some two thirds of buyers are still securing full or close to full bonds”.
“The market remains driven by the low to mid-price segments to about R1.5 million and up to R3 million in some areas, largely buyers who need home loans. These are predominantly buyers with fixed incomes who are not particularly affected by the Covid pay cuts which we have seen in industries such as tourism and more informal sectors,” adds Seeff.
While inflation continues to dip, “being down to 3% for September and now at the bottom of the Reserve Bank’s target range”, it remains to be seen what the outcome is for this month’s meeting – he suggests a strong case for a “possible further interest rate cut of 25bps this month to stimulate the economy given that most sectors, unlike the residential property market, remain muted”.
However, the South African Reserve Bank policymakers says the “monetary policy alone cannot improve the potential growth rate of the economy or reduce fiscal risks.”
The South African Reserve Bank held its benchmark repo rate unchanged at a record low of 3.5% during its September meeting, however the decision was not unanimous and follows 300 bps rate cuts so far this year to support an economy already in recession before the pandemic shock.
It said further easing is “unlikely in 2020” but hinted “two rate increases in the Q3 and Q4 of 2021”.
“The repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” says Reserve Bank Governor Lesetja Kganyago.
“Global economic and financial conditions are expected to remain volatile for the foreseeable future. In this highly uncertain environment, future decisions will continue to be data dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on second round effects.”
The Committee says it expects that the domestic economy will shrink by 8.2% in 2020, compared to July’s estimate of a 7.3% contraction, before rebounding by 3.9% (previously 3.7%) in 2021 and 2.6% in 2022 (previously 2.8%). Estimates also point to 3.3% inflation in 2020 (vs prior 3.4%), 4% in 2021 (vs prior 4.3%) and 4.4% in 2022 (vs prior 4.3%).
The outcome will be known as the Reserve Bank Monetary Policy Committee prepares to release the next update on 19 November.
Article courtesy of Lexis Digest.