More people buying their dream home as interest rates look set to remain low for most of 2021
After a year in which the residential property market defied expectations - showing unexpected growth in the midst of a pandemic and numerous economic challenges - all eyes will be on the Monetary Policy Committee (MPC) this week to see whether the interest rates will hold steady, or drop even further, giving more South Africans the opportunity to afford their dream home.
"If there is one thing that 2020 taught us - it's to expect the unexpected. While the South African Reserve Bank's forecast models indicated last year that the repo rate would remain steady for most of 2021, it is possible that it may in fact drop by a further 0.25 basis points as a second wave of COVID-19 places additional strain on a subdued economy," says Carl Coetzee, CEO of BetterBond.
While the year-on-year change in the Consumer Price Index, published by Statistics SA for November, is within the SARB's 3-6% target range, at 3.2% it is close to the lower end. "A 25 basis point drop would take the prime lending rate from its current low of 7% to an even lower 6.75%, giving further impetus to the property market recovery we saw in 2020," says Coetzee. Even if the repo rate should hold steady, conditions have already set the scene for a bumper 2021 for the property market. "While it is impossible to predict what lies ahead, we do know people are buying homes like never before. The year has certainly started with a bang."
BetterBond recorded its best December in history, with a 53% year-on-year growth in bond applications at a time when home buying activity is traditionally slower. There was also a 56% increase in grant value. "This shows that South Africans with the financial means to apply for a bond are making the most of the current lending environment. They are not only applying for a bond, but they are able to afford 30% more than they would have in January last year, when the prime lending rate was in double digits," says Coetzee. BetterBond's average approved bond size increased by close to 9% year-on-year, while the approved bond size for first-home buyers increased by almost 10%.
It's important to place the growth in bond application volumes within the context of last year's repo rate cuts, says Coetzee. The first modest repo rate cut in January dropped the prime lending rate to 9.75%. Two months later, the SARB responded to mounting concerns about the impact of COVID-19 and slashed the repo rate by 100 basis points. A second 100 basis point cut in April took the repo rate to 4.25%, dropping the prime lending rate to 7.75%.
Following two more repo rate cuts in May and July - at 50 and 25 basis points respectively - the year ended with the prime lending rate holding steady at 7%; the lowest it has been in more than five decades. "It is only when one considers the real saving on a bond repayment - from a prime lending rate of 10% to the current 7% - that one realises the significance of last year's repo rate activity," says Coetzee. At a prime lending rate of 10%, the monthly repayment on a R1 million home would have been about R1 900 more than it is now, with the prime rate at just 7%. Over a 20-year bond term, this results in a substantial saving of R455 000.
"Instead of the doom and gloom many had predicted for the housing market, there's been a resurgence in buyer activity. More people can now afford to make aspirational purchases and, for the first time in decades, it is cheaper to buy a home than it is to rent one of the same value," explains Coetzee. "When lockdown restrictions first eased in June last year, we saw a massive surge in bond applications. Initially, it was thought that this was just pent-up demand. But the sustained bond activity indicated that the lower interest rate was undoubtedly driving the robust recovery." Also, first-home buyers have consistently accounted for at least 70% of all BetterBond's applications since then, a clear sign that the lower interest is enticing more buyers to apply for finance.
According to FNB Property data for November, house prices increased by 2.6% in October 2020, year-on-year. This means that house prices dropped by only 0.4% in real terms, after deducting consumer inflation of 3%. FNB also reports that the average time a property is listed before selling has dropped to 10.6 weeks, down from the 13 weeks recorded in the first quarter of 2020. Much of the sales activity has been at the lower end, which has resulted in increased demand and greater house price growth. However, there are signs that activity in the upper end of the market is starting to pick up, says Coetzee.
"Approval rates are also doing well, with BetterBond's loan-to-value ratio (loan amount as a percentage of the purchase price) at 89% for the last quarter of the year. The average loan-to-value ratio over this period for first-home buyers, who usually require greater financial support, was 94%," says Coetzee. This means that first-home buyers on average only required a 6% deposit. By applying to more than one bank, BetterBond was also able to secure an average interest rate reduction (over this period) of 0.61% for their clients. "To put that into real terms, as the table below shows, on a R2 million bond with BetterBond applying for finance to the banks on your behalf, you would save a further R174 000 over the term and R725 monthly."
|Saving on a bond of R2 000 000 over 20 years|
|Average interest rate concession||Interest rate||Monthly repayment||Total repayment||Saving|
|7% (Prime)||R15 506||R3 721 434||n/a|
Prime minus 0.17%
|6.83%||R15 302||R3 672 612||R48 822|
Prime minus 0.34%
|6.66%||R15 100||R3 624 108||R97 326|
Prime minus 0.51%
|6.49%||R14 840||R3 575 926||R145 508|
Prime minus 0.60%
|6.39%||R14 782||R3 547 734||R173 700|
Coetzee believes that last year's buyer activity will continue this year, even if the MPC decides to keep the repo rate steady this week. "The good news story of lower interest rates and improved affordability is starting to spread, and we believe that even more homebuyers will apply for bonds before the repo rate starts its gradual increase towards the end of the year, or even later in 2022." Most of the economists polled by Reuters said that while the repo rate is likely to remain steady at 3.5% this week, there is room for at least one modest 25 basis point cut this year, adds Coetzee. "With no rate hikes on the cards for the foreseeable future, there is still ample opportunity to buy that dream home."