Interest rate cut won’t turn around property market – Rode

Not enough to ‘cancel out the deleterious effect of the recession, which has been exacerbated by Covid-19’.
Image: Shutterstock

South Africa’s interest rate is at its lowest level in seven years, but don’t expect lower interest rates to turn the property market around just yet.

That’s the view of Kobus Lamprecht, head of research at Rode & Associates, in the latest Rode Report on the South African Property Market (Q1:2020), published this week.

“The interest rate cuts of 2020 will be slight support − but by far not enough − to cancel out the deleterious effect of the recession, which has been exacerbated by Covid-19,” he says in the report.

Read: Repo rate slashed by 1%

“Usually, interest rate cuts will encourage consumers to take on new debt,” adds Lamprecht. “However, given the very dismal economic outlook, especially now with the coronavirus crisis,

…it would be wiser for consumers to use this opportunity to keep their repayments on their existing debts up to date or to save for when interest rates rise again.”

He says many people have seen their financial ability to purchase property reduced considerably due to the crisis, especially those unable to work during the three-week lockdown and those invested in the equity market.

The South African Reserve Bank (Sarb) slashed its repo rate to commercial banks by 100 basis points in March – the biggest single cut in years and the first consecutive cut by Lesetja Kganyago since he became bank governor in 2014. Sarb’s Monetary Policy Committee (MPC) cut the repo rate in January by 25 basis points.

Read: Monetary policy alone can’t fix economy – Sarb governor

With the repo rate now at 5.25%, the prime lending rate is at 8.75% – its lowest level since late 2013. According to Lamprecht, the rate is now close to the lows of the early 1970s.

“Interest rates were lowered to provide support to the economy and the cuts were made possible by subdued local inflation and a worldwide trend of very accommodative monetary policy. Real interest rates (after inflation) are still quite high, which leaves room for further easing if required,” he points out.

More rate cuts

During the recent MPC announcement on March 19, Kganyago indicated that further rate cuts could be on the cards this year and in 2021.

“The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicated three repo rate cuts of 25 basis points each, in the second and fourth quarter of 2020, as well as in the third quarter of 2021,” he said.

“Monetary policy can ease financial conditions and improve the resilience of households and firms to the short-term economic implications of Covid-19. Our decision and its magnitude seeks to do this in the near term. Monetary policy however cannot on its own improve the potential growth rate of the economy or reduce fiscal risks,” added Kganyago.

According to Pam Golding Properties, the recent 100-basis point interest rate cut will see homeowners with a R1 million mortgage saving around R648 per month, as calculated by ooba. On a R2 million mortgage, a monthly saving of R1 296 can be expected.

Meanwhile, Lamprecht notes in the latest Rode Report that South Africa’s housing market remains under pressure, with national house price growth continuing to slow in the first quarter of 2020.

“National house prices, as measured by FNB, grew by 3.1% in nominal terms in February 2020 compared to February 2019. This implies that prices have continued to decline in real terms, after adjusting for building-cost inflation,” he says.

With regards to the buy-to-let residential flat market, he points out that vacancy rates increased to 6.1% in the first quarter of 2020, from 5.5 in the fourth quarter of 2019.

“High flat vacancy rates have led to slower rental growth, which averaged 3.8% on a yearly basis in the fourth quarter of 2019. This implies that rentals rose at roughly the same rate as consumer inflation, but lower than building-cost inflation,” notes Lamprecht.

“Flat vacancy rates will likely rise more in the short term as the shrinking economy, now aggravated by Covid-19, puts significant financial pressure on many tenants. A positive for the oversupplied market is that new completions are slowing, while developers are also planning to build less,” he says.

Listen: Erwin Rode discusses the latest Rode Report on the SAfm Market Update with Moneyweb

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Too little cash flow in the formal sector in other words high unemployment will further stifle growth. We are in deflation mode. Now for salary cuts.

Yaa. Cut it. We have not totally wiped out the pensioners yet.

Growth is wiped out.
A currency that is obliterated in 26 years.
Jobs wiped out. … mass unemployment on the cards
Transport minister just allowed taxis to operate … Population soon to be wiped out…by an invisible ghost.
The JSE bubbling … cos their is more liquidity in the system and no real growth … bubble soon to burst.
Liquidity will raise prices…..

So, Negative Growth, low interest rate, high inflation rate, weak currency, high unemployment environment…

what more can be wiped out? stolen?

If you want a clear, objective and unbiased picture of the effect of ANC policies on the economy, then simply take a look at the graph that depicts the value of the JSE Real Estate Sector in terms of the dollar, and more importantly, in terms of ounces of gold.

Since 2005, the Real Estate Sector has lost 95% of its value relative to constant purchasing power(gold). This loss of value went into salaries and BEE projects at state monopolies. It went into redistributive rates and taxes. It was siphoned off to Dubai through the electricity grid. From the Hitachi deal, it went straight into Chancellor House to fund the ANC. The value of the Real Estate Sector went as financial support to the bosses of militant labour unions. The salaries and benefits of municipal employees have drained the value of pension savings in the Property Sector.

This graph shows the devastating effect of socialism on private property. The listed Property Sector serves as a proxy for property rights and the rule of law. We have lost 95% of property rights and the rule of law, in terms of stable purchasing power, in our constitutional democracy, under ANC control.

The socialist redistributive project has run its course. Liquidity and equity have been redistributed successfully, and now, inequality and unemployment are higher than ever. We have reached the stage where the only asset that remains to be redistributed is the purchasing power of the currency. The Reserve Bank has started with this process last week.

Gold has had a suppressed value for a long time, the US keeps flooding the market with their fake fiat. The actual price of gold should be around $5000 an ounce but the problem there will not enough gold to move around because of the soon to be legislations and therefore everyone will move to Bitcoin and other crypto assets which have a moveable store value.

The government could easily redistribute land by making all state owned land for sale at R2500 per plot 250m2 limited to 1 per individual and non transferable for 5 years. The economy would be stimulated by at 7% GDP a year for the first 5 and probably peak at 9% after that becausw tangible attests would we traded all whilst the Goverment would he collecting fees.

Alas they will try all these fancy accounting methods to wave the magic stick so that everything improves of which it will not, this QE knee jerk reaction only allows for more paper to have fake promises printed on it which have already been rated as Junk.

Like I told my dad that the value of his house is not the lip service of the Estate agent but rather what someone is willing to pay for it.

How much are you prepared to pay?

In a free-market society property is an asset, something that protects the investor against inflation, a store of value. In a socialist society property is a means of extortion, a source of revenue for the redistributive government policies, a source of taxation and aa address where the law and SARS can find you. A property owner is a mere cash cow for the socialist state, while he is the foundation of the economy for a free market society. The ANC destroyed the basis of the economy, and now they are wondering why it is crumbling on top of them.

Sorry, I’m with Buffet on this one … gold is a ‘barbarous relic’ (sic)

In fact it is stupid to lower rates at this time at all.

Property is representing a Home rather than an investment right now: It used to be part of ones estate planning : Now it appears to be a temporary residence until expropriated and occupied/redistributed free of rates etc by the masses !

You could cut interest rates to zero but banks still won’t pass on the cut because they don’t lend out money easily in a risk off market.

This is probably the last interest rate cut. Any day soon inflation is about to go north while economic activity goes south.

The stagflation that started several years ago is picking up steam.

Banks get the difference between REPO and Prime…. if REPO is zero Prime will be three. Banks never lose… They always get their cut. The central bank does not have to be screwing us this 5,25%… What have they done for us. Police my spending behavior and that gives him 5,25%… That’s being brain dead for citizens.

My question for government is why are they allowing the credit cards companies (which are the bed rock of peoples’ individual woes)do not cut their rates. I know every so often there’s a reduction BUT the the banks add service fee, card fee, etc… So I think the government should use the National Credit Regulator and demand. I know it’s a capitalist world BUT ????

End of comments.

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