Unchanged repo rate ends year on a positive note

Dr Andrew Golding, chief executive of the Pam Golding Property group

Dr Andrew Golding, chief executive of the Pam Golding Property group comments below:

After initial concerns that renewed inflationary pressures (with headline inflation rising in recent months on the back of higher food and energy prices) would prompt the MPC to hike interest rates once more at this week’s MPC meeting, the announcement that the repo rate would once again remain stable hopefully indicates that the tide has indeed turned – that the current interest rate cycle has peaked and that we may now anticipate the likely timing of the first interest rate cut during the course of next year (2024).

In the housing market, this is certainly good news for interest-rate-sensitive first-time buyers, whose applications (according to ooba) continued to decline in October (2023) to 47.3% of ooba’s total mortgage applications. This is compared with the early stages of the pandemic, when the Reserve Bank cut interest rates aggressively, applications from first-time home buyers in May 2020 peaked at 56.2% of all applications received – at a time when the prime rate was 7.25%.

It is also positive for existing homeowners with mortgages, or those seeking credit in order to downsize, upsize or simply relocate in accordance with changes in lifestyle or other requirements . Also according to ooba, the average purchase price paid overall and by first-time buyers was largely unchanged in October, easing to R1.44 million and R1.126 million respectively.

The rising cost of living and series of interest rate hikes have weighed on local household incomes. With price pressures easing and the prospect of interest rate cuts on the horizon – plus some easing of the severity of loadshedding in recent months – this should go some way towards galvanising the local housing market in early 2024.

The shift towards a more optimistic outlook in regard to the repo rate resulted from a number of favourable trends in the international environment, notably:

Confirmation that US inflationary pressures are subsiding has reinforced the view that the Federal Reserve Bank has finished hiking interest rates, weighing on the dollar and supporting the rand, which has strengthened since the last MPC meeting,
The oil price has eased which, combined with a stronger rand, signals the potential for a cut in the petrol price of at least R1 per litre in early December 2023.

However, another view is that while the hiking phase of the current interest rate increases may have ended, interest rate cuts may still take a while to materialise. This is due at least partially to the fact that a large number of risks and uncertainties remain globally. Oil-producing nations (Opec+) plan further output reductions, conflicts in Ukraine and particularly the Middle East could escalate, while local factors – including loadshedding and Transnet’s logistics failures – could further fuel local price pressures. The rand, as always, remains vulnerable and therefore potentially volatile – which presents challenges for the local inflation outlook.

One can, however, take comfort in the fact that even as the headline inflation rate rose to 5.9% year on year in October from 5.4% in September, the core inflation rate (excluding food and energy) fell to 4.4% in October from 4.5% in September, suggesting that recent price pressures are not becoming more broad-based.

While this is the third consecutive interest rate hold, the MPC’s focus remains on anchoring inflation expectations around the mid-point (4.5%) of the inflation target. Inflation expectations remain high at present, and having raised interest rates aggressively, the MPC may be reluctant to ease too quickly given the ongoing inflation risks. Much will depend on the timing of US interest rate cuts, as this will provide scope for the MPC to cut local interest rates without potentially risking renewed rand weakness.

The Fed has signalled its own reservations about the US inflation outlook and so it too is likely to proceed with caution. The timing of rate cuts next year will depend on future economic developments, but currently, it seems that they are only likely to materialise during the second half of the year.

Further complicating the outlook in 2024 is the prospect of US and South Africa’s elections next year, although the recent decision by S&P Global to affirm SA’s credit rating is a reassuring sign of stability.

Generally speaking, the outlook for 2024 is likely to show a noticeable improvement in a number of key residential property metrics when compared to 2023. Dominating this improvement in outlook will hopefully be the start of a downward trend in interest rates which nearly always signals an uptick in activity and which, as a consequence, is also likely to herald the start of a cycle of real house price growth. In recent months, growth in house prices nationally has stabilised at 3.3%.

Furthermore, with the toll that loadshedding took on the economy in 2023 expected to ease significantly during the course of next year, prospects for growth should improve.

We also anticipate a continued divergence between the performance of different regional and metro housing markets – reflecting both the stability of the local municipality, the affordability of homes, the strength of the local economy and the lifestyle offering of the town/suburb. This will make location an increasingly important factor.

For further information contact Pam Golding Properties via headoffice@pamgolding.co.za or visit www.pamgolding.co.za

All comments above by Dr Andrew Golding, CE of the Pam Golding Property group