While the last Monetary Policy Committee (MPC) meeting left the repo and prime lending rates unchanged for 14 consecutive months, experts now believe that Quarter 4 of 2024 will hold a more buoyant outlook.

Gavin Lomberg, chief executive officer of ooba Home Loans shares that in the higher for longer interest-rate environment, relief and intervention is needed. “We strongly believe that a rate cut will be the key to unlocking higher volumes of activity in upcoming months.”

And while a return to Covid-19-era historic low rates of 7% is unlikely to transpire any time soon, Lomberg adds that there is much speculation around a rate cut of around 25 basis points (bps) as early as next month.

“The reasons for this centre around the moderating of local inflation – notably food and petrol prices - and the easing of US inflation. And, as the country continues on the path towards an imminent rate cut, we anticipate a slow rise in homebuyer confidence, more competitive bids for homes and a steady return of first-time homebuyers to the property market.”

Impact of rate cuts

Lomberg further speculates on the positive impact that rate cuts could have on the market, and how these will impact the property sector: “When rates do soften, we believe that homebuyer confidence will increase, resulting in stronger market activity and more competitive offers on homes."

However, Lomberg does caution that it will take time. “While a 25-basis points rate cut will not solve all our problems, it does signal the start of the rate-cutting cycle and is set to bolster confidence in the market.”

He adds that, “Some homebuyers tend to take a more cautious approach to home buying, so they might wait to see how the market plays out over the remainder of the year, prior to making a purchase. This is particularly evident among first-time homebuyers who are more rate sensitive.”

Overall, Lomberg believes that increased competition among homebuyers will benefit sellers, as a rise in demand during a prolonged buyer’s market could lead to more competitive bids on homes and higher asking prices.

“As it stands, we are seeing increased purchasing power from buyers aged 18 to 36 while homebuyers aged 37-years-plus are purchasing less expensive properties than they were last year,” shares Lomberg. “With this in mind, it will be interesting to see how each buying segment responds to rate cuts – particularly the 37-plus aged category which seem to be most affected by the increased cost of living and is now spending less on homes.”

Investment property continues to yield strong demand in South Africa, registering the highest quarterly average in Q2 ‘24 (now at 12%) and Lomberg hopes that this will in fact ramp up as rates decrease.

“What will be most interesting to observe is the growing interest from Gen Z homebuyers for buy-to-let properties. In Q2 ‘24, 9.2% of all applications received from buyers in this age group were for the financing of investment properties. This is significantly up on the 3.0% recorded in this category of property acquisition by Gen Z buyers in 2019,” says Lomberg, pointing to property as a wealth-creation strategy that is being widely embraced by the younger generation.

“All-in-all, as interest rates drop and between first-time homebuyers, the influx of buy-to-let buyers and second-time homebuyers, we anticipate a gradual rebound in market activity – particularly in regions of key interest such as Western Cape and Gauteng.”

Rate cuts affect Gen Zs

According to ooba Home Loan’s latest data (Q2 ‘24), first-time homebuyers currently make up 46% of its customer base – down by 10% from its peak in May 2020 when interest rates reached a historic low of 7% and first-time buyer applications peaked at 56%.

“Based on this downward trend, it’s clear to see that first-time homebuyers are feeling the effects of a higher for longer interest-rate environment and the rising cost of living,” says Lomberg.

However, should the predicted rate cuts be implemented, Lomberg expects this trend to reverse with first-time homebuyers being some of the first to respond.

“The idea of homeownership certainly appeals to first-time homebuyers, especially the incoming generation of purchasers – Gen Zs who have in fact registered a 30% increase in the average purchase price paid over the past five years (aged 18 to 25),” notes Lomberg.

Comparing the higher volume (49.1%) of applications received from first-time homebuyers in Q1 ‘23, when the prime lending rate was 50 bps lower (11.25%), to the current low application levels, shows the impact that even a half a percentage point-rate difference can have on deterring would-be homebuyers.

“This also gives us insight into how they may react when rate cuts come to pass.”

Approvals, pricing

“The banks aren’t easily deterred,” notes Lomberg. “The country’s major lenders continue to back buyers, offering competitive interest- and approval rates.”

Against all odds, the banks have continued to create attractive lending conditions to cushion the economic pressures facing homebuyers, with measures including steady approval rates, offering higher concessions to prime and lending at high Loan-to-Value (LTV) ratios.

Lomberg adds that despite the prime lending rate soaring from 7% to 11.75% over a four-year period, there has been little deviation in the banks’ support for homebuyers.

As it stands, bank approval rates remain steady, recording only a minor dip year-on-year (-0.7% in Q2 ‘24). “This is an indication that the banks’ lending appetite is still robust, and that homebuyers’ affordability has stabilised with the interest rates remaining unchanged since May 2023,” he shares.

Looking ahead in anticipation of the easing of interest rates in Q4 ‘24, Lomberg expects that bank approval rates will strengthen. “The cheaper cost of borrowing will make financing more accessible to homebuyers. The country’s key lenders are likely to continue competing for home-loan business by offering attractive interest-rate discounts, further aiding homebuyers.”

Positive trend continues throughout

One clear positive trend that has emerged during the extended rate-hike cycle is that of financially savvy homebuyers.

“Albeit a recorded dip in Q2 ‘24, we continue to see homebuyers prioritising deposits to reduce their monthly repayments to ‘shield’ them from the fluctuating interest-rate environment.”

And despite a sharp downturn of 11% quarter-on-quarter (now at 9.7% - R111,279), the average deposit paid by a first-time homebuyer still exceeds that of the national average of 6.4% (R92,673).

Favourable lending conditions persist

Lomberg is excited by the prospect of rate cuts to stimulate much-needed market activity. “Timing your purchasing decision to align with rate cuts, however, is a short-sighted strategy as rates can fluctuate drastically in a short period of time. Take a long-term view to your investments and prioritise homeownership as a wealth-creation strategy.

“Lending conditions remain supportive and there are plenty of bargains to be had on the market at present, supported by motivated sellers. Homebuyers should take all these factors into account when deciding when the right time is to make an offer,” he concludes.

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