How upcoming Interest Rate cuts could revitalize South Africa's residential property market

As South Africa anticipates potential interest rate cuts in the fourth quarter of 2024, industry experts are weighing the possible impacts on the residential property market. Although the Monetary Policy Committee (MPC) has maintained steady repo and prime lending rates for over a year, there is growing speculation that a modest reduction of around 25 basis points could be on the horizon due to easing inflation both locally and in the US.

Impact on Homebuyer Confidence and Market Activity

Gavin Lomberg, CEO of ooba Home Loans, suggests that even a slight rate cut could significantly boost homebuyer confidence and market activity. Historically, lower interest rates have been linked to increased market activity, and Lomberg expects that a rate cut could stimulate a rise in competitive bidding for homes and a return of first-time buyers to the market. Despite this, he acknowledges that a 25-bps cut won’t resolve all issues but will serve as a catalyst for increased market engagement.

1. Buyer and Seller Dynamics

Lomberg points out that while a rate cut may not immediately transform market conditions, it will likely encourage more competitive offers and potentially higher asking prices. He notes that younger buyers, particularly those aged 18-36, are currently showing increased purchasing power, whereas older buyers (37+) are gravitating towards less expensive properties due to higher living costs. This shift could lead to varied responses across different buyer segments.

2. Investment Property Trends

The demand for investment properties in South Africa remains robust, with Q2 2024 seeing a notable increase in interest from Gen Z buyers. This demographic's applications for buy-to-let properties have risen significantly from 3% in 2019 to 9.2% in 2024. Lomberg anticipates that as interest rates decline, this trend will likely continue, reflecting a broader interest in property as a wealth-building tool.

3. Effects on First-Time Homebuyers

First-time homebuyers, who currently represent 46% of ooba Home Loans’ customer base, are feeling the pinch of prolonged high interest rates. This group saw a decrease in applications compared to earlier periods when rates were lower. Lomberg expects that predicted rate cuts will reinvigorate interest from this demographic, particularly among Gen Z buyers who have been increasingly paying higher average purchase prices over the past five years.

4. Banking and Lending Conditions

Despite the challenges posed by high interest rates, banks have maintained competitive lending conditions. Approval rates and lending terms have remained relatively steady, even as the prime lending rate rose from 7% to 11.75% over the past four years. Lomberg predicts that as rates decrease, banks will likely enhance their competitive offerings, which will make financing more accessible and appealing to potential buyers.

Future Market Outlook

Lomberg emphasizes that while the prospect of lower interest rates is promising, homebuyers should adopt a long-term perspective rather than waiting for ideal conditions. He advises that the current market still presents opportunities, with motivated sellers and favourable lending conditions providing a strong foundation for prospective buyers.

In summary, the anticipated interest rate cuts are expected to boost confidence in the residential property market, encourage more competitive bidding, and renew interest among first-time and investment property buyers. However, buyers should approach the market with a strategic, long-term mindset to maximize their investment opportunities.