Repo rate unchanged but interest rates are still at their lowest in recent history, making it the right time to bond
The repo rate may remain unchanged, but the scene has already been set for a market recovery as interest rates are at their lowest in recent history.
"We have seen five repo rate cuts since January and the current lending environment, with the prime interest rate at a historic low of 7%, means that it is already a great time to apply for a bond," says Carl Coetzee, CEO of Betterbond.
"Notwithstanding the economic challenges caused by the global pandemic, we can't overlook the significant impact the South African Reserve Bank's decision to keep the interest rate low has had on the property market," says Coetzee. "Instead of the house price freefall many had expected because of the restrictions on property transactions, we are seeing that house prices are starting to stabilise, and even strengthen, as the low interest rate motivates buyer activity."
FNB has reported house price growth of 1.4% year on year, and BetterBond has seen an increase in average house prices listed in bond applications across all price bands. "The lower interest rate is stimulating demand, which in turn is strengthening house prices, especially at the lower end of the market. Buyers are able to qualify for bigger bond amounts because of the lower interest rate, and it remains an ideal time to bond."
While much of the activity was initially focused at the lower end of the market, where buyers are able to save on additional costs because of the R1 million transfer duty threshold, the record-low interest rate is also benefiting buyers in the mid to upper sections of the market. Formal grants for homes between R1 million and R1.5 million were up 4.29% in August, with grants for homes of up to R2.5 million up almost 6%. BetterBond's intake of bond applications for houses of more than R3 million increased in August, with the highest concentration being in the Western Cape - traditionally the top performing metro market in the country in terms of house price inflation.
Bond application volumes over the last three months have exceeded pre-lockdown levels, with BetterBond recording a 52% increase year-on-year in August. This trend is continuing in September, with figures thus far already showing a 48% increase in applications year-on-year. "Especially encouraging is that of the increased volume of applications since June, 70% were from first-home buyers, up from the 60% recorded previously," says Coetzee. Furthermore, BetterBond has seen a staggering 123% increase in online pre‑approval applications since June which, if they translate into approved bonds, could add further impetus to the market recovery we are already seeing.
The average bond amount has increased from R1 million to R1.2 million, says Coetzee, and almost 60% of all applications approved in August were for bonds of 100% and higher of the purchase price. Furthermore, the average amount of the deposit required for a bond has also dropped across all price segments, says Coetzee, as banks show their willingness to grant larger bonds. Buyers are able to afford more than they would have at the start of the year, when the prime lending rate was 10%.
This is the first time in the history of the new South Africa that it is possible to buy a home at an interest rate this low, emphasises Coetzee. If you buy a R1 million home, at the 7% prime it is now, you are paying 80% less than you would have in 1994 when the interest rate was at 16.25%. This means that when most buyers were able to enter the property market for the first time in a democratic South Africa, it would have cost them R3.4 million in repayments for the same R1 million property that today will cost just R1.86 million to finance.
"Buyers would do well to make the most of this momentous time in our history. Although the SARB forecast is that the low interest rates are likely to prevail for the next few years, it's unlikely that we will see these record-low interests again once they start to gradually increase," says Coetzee.
"While it may be too soon to say whether the market recovery we are seeing is sustainable, it's undeniable that 2020 - which has seen rates slashed by a colossal 300 basis points - has been a gamechanger for the property market."