Lower interest rates will reduce the cost of financing homes, thus enabling a higher affordability at a given monthly financing payment.
Image: Simphiwe Mbokazi / Independent Newspapers.
Since the property asset class is very capital intensive, an interest rate cut will benefit the sector from a cost of capital point of view.
Responding to an "Independent Media Property" enquiry, Douw Boshoff, a Professor in Real Estate at the University of Pretoria(UP) said not only is bank financing cheaper, but due to the reduction in returns on the money market, the equity market becomes more attractive and equity investors would be prepared to invest at an equally lower return, thus supporting the cost of capital from both a bank lending and equity investment point of view, Boshoff said.
In addition to the above, he said lower interest rates will reduce the cost of financing homes, thus enabling a higher affordability at a given monthly financing payment.
“This would increase demand for house purchases and thus have a positive impact on sales prices, or values overall.
In addition to this, the higher disposable income, especially in the lower to middle-income brackets, will increase the demand for goods and services, which in turn will improve the demand for space, and ultimately rental in the commercial property market.
This will also positively impact the value of commercial property.”
Professor Waldo Krugell, of the School of Economic Sciences at North-West University, concurred that a repo rate cut will benefit the local property and real estate sectors.
“It is simply about the affordability of a bond. Every bit that the repo rate is lower helps to make property more affordable for prospective buyers,” Krugell said.
Boshoff said it is, however, a fact that reduced interest rates might have an upward shift in inflation. He said from a property perspective, that might not be all bad.
“Higher inflation also pushes up rental for commercial space (which is typically absorbed in the general price inflation of tenants’ goods and services) and cost of construction, which although negative for the construction sector, creates a more competitive position for existing properties, in either the residential or commercial sectors, with the potential of increased values.”
The real estate professor said it can thus be concluded that, the more the cut in interest rates, the better the position for the property sector, especially in the short term.
He said the long-term view becomes more of a balancing act, whereby the economy at large must be considered.
If the reduction is too large, inflation will increase too fast, and ultimately reduce the affordability of goods and services, and have the opposite effect on the property sector than as discussed above. So careful consideration of the optimal point is crucial, he said.
“The expectations are anything from no cut to either a 0.25% or 0.5% cut. Ideally, I’d vote for a 0.5% cut, but expectations are probably more realistic at a 0.25% cut, although no cut this round is also probable.
"Again, from a property perspective, the 0.5% cut would be ideal, as the market needs it and the economy would require any stimulus it can find, especially in the light of the recent Budget announcement and increase on VAT, etc.
"It is believed that this would not be excessive in terms of its influence on inflation, but it is most probable that no, or just a 0.25% cut will be achieved,” Boshoff said.
Krugell said economists are divided about the possibility of such a cut.
He said many believe that the MPC are concerned about so-called upside risks to the inflation outlook: the VAT rate increase, electricity tariff increase, and the impact of international trade uncertainties on the exchange rate (though the rand is relatively strong at the moment).
“The conservative option is to wait a round, keep the repo unchanged, and see how these forces play out,” Krugell said.
Katrien Smuts, an economist at the Bureau of Economic Research(BER), said according to the latest "Other Services" survey results for the first quarter of this year, business volumes in the real estate sector remain well above historical norms, with business conditions in this subsector improving to levels last seen over 15 years ago.
She said the 75-basis-point reduction in interest rates since September last year has provided a boost to activity in this sector.
“Should the South African Reserve Bank (SARB) decide to implement another rate cut this week, it could further support the real estate sector and offer some relief to mortgage holders.
"A lower repo rate would reduce borrowing costs, potentially leaving households with slightly more disposable income at the end of the month.
"Additionally, lower financing costs could make property purchases more affordable, potentially stimulating demand in the sector,” Smuts said.
However, the BER emphasised that this statement does not indicate support for a rate cut or suggest that the property sector requires one.
“Rather, we are noting that, if a rate cut were to occur, it would likely have positive implications for the real estate sector.”
Independent Media Property