with interest rates expected to remain elevated for some time, prospective homebuyers may be better off holding back a little while longer. Photo: Jacques Stander/Gallo Images
Inflation has retreated, which would usually spell good news for borrowers looking to get in on the housing market. But with interest rates expected to remain elevated for some time, prospective homebuyers may be better off holding back a little while longer.
Data released last week bucked expectations, showing that inflation had once again fallen faster than expected. Statistics South Africa said headline consumer inflation moderated to 4.7% year-on-year in July from 5.4% in June, the lowest reading since July 2021.
The month prior, the annual inflation rate eased back into theSouth African Reserve Bank’s 3% to 6% target range for the first time in 14 months.
With the inflation rate now closer to the midpoint of that target range than it has been in two years, the Reserve Bank may be encouraged to relax monetary policy. But economists don’t expect this will be the case — at least not for quite a while — as a hawkish Reserve Bank guards against upside risks to inflation.
“Those risks will probably keep the Reserve Bank on its toes and it will not rush to cut interest rates,” FNB property economist Siphamandla Mkhwanazi said.
That said, Mkhwanazi, like a number of his colleagues, believes interest rates have peaked.
In July, the Reserve Bank’s monetary policy committee (MPC) opted to leave the repo rate unchanged at 8.25% — breaking a streak of 10 consecutive hikes in the cost of borrowing. The prime lending rate, the interest rate charged by commercial banks, is at 11.75%, the highest level since 2009.
Monetary tightening, which started in November 2021, spelled the beginning of the end of the housing market’s mini-boom, experienced in the wake of the historically low interest rates during the Covid-19 pandemic.
Following last week’s print, Investec chief economist Annabel Bishop said inflation will probably lift somewhat in August on base effects. Although the annual inflation rate could return to 5%, Bishop said the MPC “should look through the temporary rise and not necessarily see it as a cause on its own to tighten monetary policy”.
Inflation is expected to average 4.5% year-on-year in 2024, according to Bishop. But there are risks, particularly in relation to food prices.
In a research note, Nedbank’s economists called the July inflation outcomes “encouraging”, but also noted upside risks to food prices. Lower inflation will probably prompt the Reserve Bank to maintain steady interest rates for the remainder of 2023, with the first cut in the first quarter of 2024 and the repo rate falling to 7.25% in November next year, Nedbank said.
Mkhwanazi said he expects the first cut to happen in July next year. “Because of those risks, I think they [the MPC] are going to be a bit more measured when it comes to interest rates.”
He said South Africa’s housing market has managed to withstand the hiking cycle headwinds relatively well, considering that the unemployment rate is also far higher than it was in 2009. The market has received some support from the semigration trend, with remote workers still looking to buy property nearer to the coast.
Having said that, the market is yet to experience the full effect of the cumulative repo rate hikes, Mkhwanazi added. “Given that, yes, interest rates might have peaked and cuts are now starting to come into view, but I expect that the growth in property prices will continue to slow — probably until the second half of next year.”
Adding to this predicament, Mkhwanazi also expects that the terminal interest rate (where the cost of borrowing could settle in the longer term) will be about 7%; 75 basis points higher than before the pandemic.
“We are probably going into an era where inflation is slightly structurally higher compared to the pre-pandemic level. There are a number of reasons for this,” Mkhwanazi said.
“There are some shifts in the supply-side of the economy. A recalibration of supply chains is one of them. Fragmentation in geopolitics, the regrouping of worlds. All of those add some friction to supply chains.”
Mkhwanazi noted that the pandemic-era low interest rates, as well as the work-from-home phenomenon, seem to have caused consumers to favour home ownership over renting.
Flat vacancy rates averaged 6.9% in the second quarter of 2023, which is well above the 5.3% average recorded between 2017 to 2019, according to real estate company Rode’s report on South Africa’s property market.
This structural shift suggests there may be more participation in the property market than before the pandemic, even with interest rates kept at their elevated levels, Mkhwanazi said.
It is difficult to aggregate the experiences of prospective home buyers, considering the different regional supply and demand dynamics in the South African property market, he noted
“But for most of the market — those who are sensitive to the evolution of economic activity and the level of interest rates — we do think that over the next couple of years demand will stay at somewhat of a standstill. That is until we see much quicker recovery in the labour market to lift that demand,” he added.