The easing of inflation both locally and globally has raised expectations that the South African Reserve Bank may cut interest rates in the third quarter of this year, with Standard Bank predicting two rate cuts by year-end.
While this would mark the first-rate reduction since the pandemic began, and would lower monthly mortgage payments, higher administrative and home servicing costs, such as rates and taxes, will continue to exert pressure on homeowners.
The upward interest rate cycle, which began in November 2021, was primarily driven by the COVID-19 pandemic, local energy issues, and volatile food and oil prices.
Homeowners with a R1,000,000 bond would have seen their monthly interest payments increase by nearly R4,000 since then, representing a more than 40% rise in instalments.
“Despite rates predicted to edge lower, benefits to customers might take a bit longer to filter through. Since November 2021, the price of electricity has increased by an average of almost 30%, or 23% above inflation.
"This added more pressure on households struggling to balance household finances,” said Thabani Ndwandwe, chief risk officer at Standard Bank SA, which has the biggest home loan book in the country.
Since November 2021, the prime lending rate has climbed by 475 basis points as the economy began its recovery from the pandemic.
Standard Bank anticipates that the central bank will reduce its benchmark interest rates twice before the year ends, with the first 25-basis-point cut projected for September.
It forecasts an additional two rate cuts in the first half of 2025, as inflation, which peaked at 7.8% in July 2022, has eased to 5.2% in May.
The Reserve Bank aims to keep inflation between 3% and 6%.
On July 18, the Reserve Bank’s monetary policy committee, which meets bi-monthly to set interest rates, decided to maintain the repo rate for the seventh consecutive time.
For a bond valued at R1 million, homeowners could save R208 per month, or R2,500 annually, from a 25-basis-point rate cut.
If further reductions of 50 basis points occur in the first half of 2025, monthly payments for a R1 million property could decrease by R625 over the year.
With R1.2 trillion in mortgages across South Africa, a 50-basis-point reduction would free up over R4 billion in annual payments, benefiting consumers by R4 billion.
This relief will help mitigate the impact of rising property-related expenses such as rates and taxes. In Johannesburg, for example, electricity tariffs increased by 12.7% on July 1, while property rates went up by 3.8%.
Charges for refuse collection, water, and sanitation have also risen faster than inflation. Additionally, prepaid electricity customers in the City of Johannesburg will face a new fixed monthly charge of R200.
Even before these hikes, South Africa’s property sector was struggling with the high cost of living. Ooba Home Loans’ latest oobarometer reveals that new home loan applications in the first quarter of 2024 were 9% lower than the same period in 2023 and 25% below the first quarter of 2022.
“A reduction in interest rate should lead to a recovery home loans application volumes, which had already started rowing by 8% since the last quarter of 2023, however this growth will likely be muted by municipal tariff hikes,” said Ndwandwe.
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