Warning over residential property market in South Africa

Landsdowne Property Group, one of South Africa’s largest residential real estate managers and estate agency company says recovery in the residential property market will take time, although interest rate cuts, lower inflation and other external factors are major catalysts for a start of a mind shift of rejuvenation.

Jonathan Kohler, Founder and CEO of Landsdowne, said: “During the past year, activity in the property market has stalled as consumers remain under significant financial pressure on all fronts. Disposable household income not only had to contend with a higher-for-longer interest rate environment but was further eroded by significant increases in electricity rates, food and transport costs.”

The South African Reserve Bank is likely to reduce interest rates by 25 basis points, which would lower the benchmark repo rate to 8%, at the conclusion of its upcoming monetary policy meeting on Thursday.

This anticipated cut follows a decrease in inflation to its lowest level in over three years, coupled with ongoing sluggish economic growth.

Recent data from Statistics South Africa shows that inflation fell to 4.6% year-on-year in July, down from 5.1% in June, marking the lowest rate since July 2021.

In its July meeting, the central bank’s monetary policy committee (MPC) revised its inflation forecast for the year to 4.9%, down from a previous estimate of 5.1%.

The MPC also expressed concerns about persistently high global interest rates, including those in the United States, noting that rates might remain elevated longer than markets had expected.

“The good news is that most of these risks have receded, buoyed further by a revival in positive consumer sentiment on the back of the formation of the Government of National Unity (GNU), an end to loadshedding, as well as a stronger performance by the rand, which led to consistent reductions in the cost of fuel as a welcome spin-off,” said Kohler. 

He added that lower inflation rates will support demand for property, as well as homeloans becoming more affordable as banks relax their lending criteria.

Kohler, however, warns that it will take time before we see the start of a sellers’ market any time soon, and that some significant headwinds remain.

“Although we’ve seen an increase in appetite from prospective homebuyers, their buying power is still limited. The respite of a marginal interest rate cut will have minimal impact, and even a 0.5% drop in interest rates will take time to reflect in demand for new homes, as consumers will likely first settle more expensive credit cards and other debt,” he said.

Kohler said prospective homebuyers will also need to factor in ongoing rates and utility increases and looming water-shedding that will require additional capital outlay to overcome.

For this reason, he believes that some consumers will continue to prefer renting as opposed to buying a property, as the monthly expenses are largely locked in, protecting the tenant from significant upswings.

The table below demonstrates the impact of various interest rate cuts on a R1 million home loan bonded over 20 years, where a 0.25% reduction in the prime lending rate will leave homeowners with R173 per month extra.

A 0.5% reduction will result in additional disposable income of R345 per month.

Loan amount (no deposit)	Interest rate	Monthly bond repayment	Monthly saving on current prime rate
R1,000,000	11.75% (current prime)	R10,837
R1,000,000	11.50% (0.25% reduction)	R10,664	R173
R1,000,000	11.25% (0.5% reduction)	R10,492	R345

Source: Landsdowne Properties

Kohler said there are pockets of excellence with transactions still taking place though volumes are down. Especially Johannesburg, which offers exceptional value for discerning buyers.

“Johannesburg will most likely benefit most from a series of interest rate cuts,” he says. “Over the past decade, there has been little to no capital appreciation in the city, making it a buyers’ market at the moment,” Kohler said.

He believes prudent investors can unlock some value, especially if the rate cut cycle continues, supported by ongoing positive sentiment around the country and Johannesburg macro-outlook.