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Celebrating the SA Reserve Bank reduced the Repo rate

Celebrating the SA Reserve Bank reduced the Repo rate

Author: by Andreas Wassenaar
Date: 2024-09-27

As a property practitioner with three decades of daily engagement with the market at the coalface of transactions, I understand the most important economic driver of property demand and transactions.

Not sentiment, although that plays a part, not political landscape although that can be disruptive and play a role, not seasonality although in some areas where winters can be harsh, it can play a role.

The most important aspect, by a long way, is the cost of money - the interest rate we pay for mortgage finance. For this reason, I am delighted that the SA Reserve Bank reduced the Repo rate - the rate at which the entire private banking sector borrows money from the Reserve Bank - by 0,25% from 8,25% to 8% on 19th September 2024, following the lead set by the US Federal Reserve which cut their rate by 0,5% from 5,5% to 5%.

Although 0,25% does not sound impressive it is important as it demonstrates that for the first time since 23rd May 2023 that rates have decreased. This high was reached when the cycle started to change from the low of 3,5% enjoyed from 23rd July 2023 to 31st October 2022.

The Mortgage Rate or Prime Rate at that time was 7%, fueling demand for property in the post-Covid world. The gap between the repo rate and the prime rate is 3,5% and represents the gap between the wholesale price of money and the retail price.

Those that had qualified for a mortgage bond on a property at 7% were loving life up to 18th November 2021 when the first series of increases boosted rates to the high of 8,25% over the 6 months to 25th May 2023.

At the peak of 11,75% the rate differential of 4,75% was causing much pain as suddenly you had to find 40% more disposable income every month to service your mortgage debt before paying your rates, levies, and all other monthly commitments.

A typical R2m mortgage loan at 7% costs you R15,506 p.m. but at 11,75%, all other things being equal, this costs you R21,674 p.m. The tiny 0,25% reduction this month to a prime rate of 11,5% immediately translates into R345 of savings per month. Not much yet, but as rates trend down the relief will come through.

When the financial pressure is high, as it has been over the past 2 years, eventual fatigue kicks in, with some homeowners having to sell being unable to afford the repayments, driving pricing down, to escape the debt trap they have found themselves in.

This is what a true buyer's market is all about and it presents buying opportunities to those that are ready and able. One thing is sure, this buyer's market window will start to close, slowly at first and then accelerate.

The market will move to an equally weighted scenario between buyers and sellers and if rates are reduced to around 2% below the current levels, we will again experience what we remember as a seller's market.

The single most important bit of advice at this point is not to delay a moment - buy now!