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Is the 2% interest rate in South Africa enough to revive the property market?

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Is the 2% interest rate in South Africa enough to revive the property market?

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3 min read

The surprise announcement in April by the Governor of the Reserve Bank, Lesetja Kganyago, of a further drop in the repo rate – by 100 basis points, to 4.25% per annum – is certainly welcome news for the property sector.

It means that the prime lending rate is now down to 7.75%, which is a record low.

In an ordinary world, any measure that seeks to stimulate the market and ease the financial burden on the consumer is undoubtedly a step in the right direction. However, the extraordinary events of the COVID-19 pandemic mean that the drop will do little to immediately revive a pre-pandemic already waning property market.

Governments tend to cut interest rates to encourage investors to take on more debt. Yet, many South Africans will have experienced a substantial drop in income, with the majority either suffering job losses as a result of the national lockdown or having been forced to work reduced hours.

As a result, most home owners will have had to take bond holidays, and investors will have had to negotiate payment terms with landlords in order to survive financially. Even though the lockdown has allowed households to save on travel and entertainment costs (which are now pretty much non-existent), any spare cash is not really being spent on anything else during the lockdown.

This means that, while households are generating significant savings due to a reduced mortgage payment, they are unable to inject these savings into other areas of the economy. The fact that deeds offices across the country have been closed and all property transactions on hold means that the savings will not be infused back into the property sector for some time.

So, in the long term the interest rate cut might be a welcome relief, but in the short term it will do little to mitigate the risk of the industry contracting significantly as we begin an incredibly slow economic recovery post-COVID-19 and lockdown.

Drop more to gain more

If we want to see an immediate revival of the market, we need to see more measures being introduced. Although a record low domestically, the drop in interest rate is still much higher than in other countries.

The British government, for example, has slashed bank rates to 0.1%, meaning that bonds can be secured for less than 3%, much lower than in South Africa and more encouraging for an investor.

Bigger steps need to be taken in order to make a real dent in the property market. Some financial experts suggest that the Reserve Bank needs to issue another interest rate cut after the lockdown restrictions are lifted, when South African home owners can resume house viewings and the transacting process can restart.

Other experts are pushing for the government to do more than just cut the interest rate again. Raising the threshold on transfer duty, for example, is another way of creating significant movement in the sector, almost immediately.

Currently, in South Africa, homes valued at R1 million or less do not have to pay stamp duty, which only really appeals to first-time buyers. However, if the threshold were extended to include homes that are valued at R3 million or less, for example, a greater proportion of home owners would be incentivised to buy and sell. Even if just for a short period of time, perhaps just for a six-month period, the measure could inject much-needed confidence in the property sector by giving buyers the financial power to move up the property ladder.

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