Can low interest rates, falling house prices sustain residential property buying activity?

First-time buyers and buyers across the board are taking advantage of low interest rates and falling house prices. However, wealthy buyers continue taking the wait-and-see how things unfold approach.

Since the beginning of 2020, the Reserve Bank has slashed the prime lending rate by a total of 300 basis points.

Read also: SARB cuts interest rates by another 100bps in wake of Covid-19

“Properties priced below R1.5 million and up to R3 million in some areas remain drivers of current market activity. Others can now get bigger home loans or move to a better neighbourhood,” says Seeff Property Group chairman, Samuel Seeff.

FNB says the aggressive reduction of low interest rates, good pricing and lower transfer duties have momentarily improved mortgage affordability. Liquidity in the market has remained relatively intact, says Siphamandla Mkhwanazi, FNB Senior Economist.

“In addition, this has incentivised renters to buy property – partly contributing to rising flat vacancies and low rental inflation.”

Can this frenzy activity last forever?

Seeff believes this buying activity likened to Black Friday sale is sustainable, and will carry well into late-2021. There is enough stock to meet demand and prices are in line with market conditions.

Samuel Seeff

Low interest rates increase affordability for buyers, hence there in increased activity in the market, Erwin Rode, MD for Rode &Associates. The residential sector is very sensitive to the level of interest rates.

“The risk facing buyers and investors is the increase in interest rates in light of the fiscal cliff that SA is facing.”

Read also: Low interest rates, falling prices send home buyers to affluent suburbs

Rode says consumers are under pressure, and when interest rates increase, some may be financial under strain with mortgage repayments. According to TransUnion, 7.8% missed more than three payments on their home loans in Q2 2020 (3.7% Q2 2019).  This excludes consumers who opted for instalment relief packages from the lenders.

“For this reason, the ‘affordable’ market is currently booming. However, the risk is when, and by how much will mortgage-bond interest rates rise again?”

FNB notes that industry-wide data shows bourgeoning home buying activity. Home loan application volumes have spiked, however, lenders continue to apply caution when assessing applications amid an uncertain economic outlook.

Best performing segments

Seeff notes that the low to mid-price segments to R1.5 million and up to R3 are current drivers of sales activity. It is cheaper to buy than rent. A bond repayment of R12 000 per month on a R1.5 million is affordable compared to R14 000 in rent.

“Buyers in these price segments have fixed incomes and not affected by pay cuts. Approval rates are still +80%, with two thirds of buyers still securing full or close to full bonds.”

Siphamandla Mkhwanazi

He says with properties priced +R3 million, buying remains more selective. Sellers will need to continue ensuring that their property offers the best value as buyers are negotiating strongly.

The FNB Property Barometer for November 2020 shows increased activity in the middle market – homes priced between R750 000 – R2.6 million. Low interest rates and lower transfer duties are main contributors of this increase.

“In our estimation, recovery is mainly driven by younger (<35 years old), first-time buyers,” says Mkhwanazi.

He explains that these buyers typically require higher gearing (higher loan-to-value LTV). Preliminary data shows that market LTVs on new loans are rising.

Falling house prices

The FNB House Price Index shows annual house price growth flatlined in October at 2.6% year-on-year (y/y). Overall, property price growth remains below inflation, as has been the case for most of the last decade.

Lower priced properties are performing better, with the bottom 20% of price distribution (below R500 000) averaging 11.4% y/y in 3Q20. The top 20% (>R1.9 million) averaged 0.7% y/y in the same period, according to FNB.

For years now, house prices in South Africa have been declining in real terms (after taking out inflation). The latest available house increases recorded are between 1%-2%, says Rode.

Erwin Rode

“Despite very low mortgage interest rates, I expect nominal house prices to turn negative in 2021 in the wake of a collapsing economy.”

SA is still far above the replacement-cost trend line, as a result, house prices are still fundamentally expensive. Rode was speaking at the REI Rode Virtual Conference on earlier this week.

Nominal house prices grew by 2.8% in August 2020 compared to the same period in 2019. According to the Rode Q3 2020, this was due to pent‐up demand, limited supply, and record low interest rates.

In the first eight months, house prices grew by 1.6% in nominal terms.  However, the sustainability of increasing house prices over the medium-term remains to be seen given a weak economic growth.

The nominal value of residential mortgages granted in H1 2020 decreased by 9% year-on-year, from falling nearly 50% in April- May.

Properties priced below R250 000 recorded the most growth over five years due to strong demand and limited supply. Homes priced between R250 000 –R700 000 continue to see growth in house prices, according to Lightstone data.

Seeff says house prices have remained very flat over the last 2-3 years with very little price growth, often at below inflation. Inflation levels are lowest since 2004/5, reaching 3% for September, and now at the bottom of the Reserve Bank’s target range.

“This makes a strong case for a possible further interest rate cut of 25bps this month to stimulate the economy. It is looking more like a V-shaped recovery for the residential real estate market right now,” adds Seeff.

BizNews Finance Friday. Taking a close look at SA investment opportunities, risks and challenges with you at noon (today) are: entrepreneur and property investment specialist Michelle Dickens, managing director and co-founder of TPN Credit Bureau; and financial advisor Lourens Reichert of Holborn Africa. Free. Register here:

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