Homebuyers need more rate cuts

MUCH-NEEDED LIFT: RECENT REPO RATE CUT COULD BOOST CONSUMER CONFIDENCE An end to rising borrowing costs hinges on the state of the economy, the rand, and inflationary pressures the rand might bring.

Although last week’s surprise borrowing-cost cut should offer some respite to, and boost the confidence of, hard-pressed consumers, it may not yet be a panacea to SA’s ailing housing market.

For the first time in five years, the Reserve Bank cut the key repo rate by 25 basis points to 6.75%, reducing the borrowing rate from 10.50% to 10.25%. Borrowing costs have risen by 200 basis points since 2014.

FNB property strategist John Loos said a borrowing-cost cut would only help existing and prospective homeowners “at the margins”. With the new borrowing rate, homeowners would save R167 and R836 on monthly payments on a R1 million and R5 million mortgage bond over 20 years respectively.

Loos said homeowners may see substantial benefits if there are further cuts to borrowing costs by the Reserve Bank. “But for now, the recent rate cut could boost a bit of confidence and sentiment. That’s the bigger psychological impact rather the rands and cents impact.”

Consumer confidence in 2017’s second quarter sunk to its worst level since 1982, according to the FNB/Bureau for Economic Research.

Existing homeowners could use the savings on mortgage payments to reduce their debt levels. This has already begun if recent figures of household debt-to-disposable income ratio are anything to go by. The ratio’s been steadily declining from the highs of 87.8% in Q1 2008 to 73.2% in Q1 2017, helping households to become less vulnerable to economic shocks and higher borrowing costs.

Absa Home Loans property analyst Jacques du Toit supports Loos’ view, saying further borrowing-cost cuts might boost the level of first-time homebuyers.

The level of first time home buyers as a total of buying has barely kept with highs of 28% last seen in 2014 – with buyers in this segment reaching 21.41% in Q2 2017.

Pam Golding Property group CEO Andrew Golding said: “The top performing sectors at present include the lower priced band under R1 million and the smaller two-bedroom sectional title market – both of which reflect the consistently strong demand from first-time buyers.”

Lower borrowing costs and falling house prices could, in theory, create an affordable entry into homeownership. Existing homeowners have been struggling to make money from their residential properties over the last two years as house prices have barely kept up with inflation.

Since December 2015, house prices declined 3.9% in real terms due to the economy’s worrying state.

Already some property economists have downgraded their 2017 house price forecasts.

Falling house prices could create an affordable entry into homeownership