How lower interest rates could boost house prices in South Africa
Responding to an Independent Media Property enquiry, economist Dr Roelof Botha said although the residential property sector has welcomed the latest rate cut, the prime overdraft rate needs to be reduced by at least another 125 basis points for a sustained recovery.
'Hopefully, the Monetary Policy Committee (MPC) will become more aware of South Africa's most pressing economic policy objective, namely, to stimulate growth and employment creation,' Botha said.
He said that in order to shed some light on what may be expected at the July MPC meeting, it is useful to reflect on the sterling performance of the rand.
'In its regular monetary policy statements, the MPC invariably addresses the issue of currency weakness, which leads to higher rand-denominated imports and adds to inflationary pressures - both directly and indirectly via the higher cost of intermediary inputs in manufacturing and other industries.'
Botha said the news on this front is exceptionally good. With both the nominal and real exchange rates of the rand exhibiting strength, he said it is clear that domestic inflation is not being threatened by currency weakness, which should lead to further interest rate cuts in 2025.
Botha said that between the end of 2019 and the first quarter of 2022, average home prices were rising at a marginally higher rate than building costs. He said parity in the annualised rate of change in the construction input price index (CIPI) and the BetterBond home price index was achieved in the second quarter of 2022, due to the negative effect of record high interest rates on the residential property market.
'Since then, the trend has been reversed, with both the CIPI and the BetterBond home price index increasing at lower rates than the consumer price index (CPI). At the end of the first quarter of 2025, the YOY increase in house prices was marginally negative, with the CIPI increasing by merely 1.5%, which is negative in real terms.'
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Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Advertisement Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Next Stay Close ✕ After moving to over R300 000 since the end of 2023, this value declined to an average of R272 000 during the second quarter. FTBs are said to have benefited even more, with a decline in the average deposit from just below R200 000 a year ago to R165 000 in this period. 'After a gradual increase until Q1 2024, the ratio of bank credit impairments to total bank assets has declined marginally to 2.5%. The deceleration in the growth of credit impairments at South African banks is a welcome development and confirms a high level of effective credit risk management.' The regional composition of home loans granted showed a YOY increase of 13.6%. The reasons for this positive trend were the marginal interest rate relief, with the prime lending rate now at 10.75%, compared to 11.25% at the beginning of this year. Bendall said that although criticism has been levelled against the monetary policy authorities for not lowering interest rates at a faster pace, any lowering immediately raises the affordability of home purchases, especially for FTBs. 'Another reason has been the declining trend of real home prices (after adjustment for inflation). Combined with sustained increases in real incomes of home loan applicants, this has also enhanced the attractiveness of buying a house. Johannesburg's South-Eastern suburbs came in at number one for loans granted,' Bendall said. The Brief showed that over the 12 months from June last year to June this year, only two regions experienced a decline in the number of home loans granted. These were the Eastern Cape and Mpumalanga. Two other regions that also underperformed relative to the rest of the regions and the national average increase of almost 14% were the North West and Johannesburg's North-Western suburbs. Greater Pretoria fared exceptionally well, with an increase in the number of home loans granted of 26.7%, possibly because of being home to the largest residential University in the country and also a number of motor vehicle manufacturers, which have spawned a large and diversified component manufacturing supply chain, the brief said. Predictably, it said the Western Cape continues to expand its home loan activity, with YOY growth of 14.7% for loans granted. Bendall said the first four months of the year have revealed striking differences in the values of houses and flats that were built in South Africa's provinces, with a spread of 100 percentage points between the worst and best performers. He said KwaZulu-Natal ruled the roost, with a YOY increase of 53.6%, whilst the Eastern Cape disappointed with a decline of 46.5%. The Western Cape was second best, with an increase of 32%, which he said is not surprising, given the ongoing phenomenon known as semigration, mainly due to superior standards of public service delivery at the provincial and municipal level. Building activity in Gauteng declined by 20% YOY, likely due to long-standing and serious deficiencies with basic service delivery, especially with water, electricity and roads. The continued demise of capital formation, especially in the area of infrastructure, has also contributed to a decline in the Afrimat Construction Index in the first quarter of this year, which reflects the lethargy of building activity, says Dr Roelof Botha, an economist and advisor to the Optimum Investment Group and Currencies Direct. 'Unless interest rates start declining at a faster pace, South Africa will continue to experience sub-optimal economic growth, due to the excessively high cost of credit and capital,' Botha said. Independent Media Property
