Are we too dependent on interest rates to improve the market?

by Natalie Muller • 4 MIN • 816 Words

“Given the structural constraints and resultant lack of economic growth in SA, residential market fluctuations are largely interest rate driven. And there is limited scope for interest rate stimulus for the housing market these days because interest rates are already relatively low, compared with, say, the 1990s,” John Loos, property economist at FNB Commercial Property Finance, explains. “These days rate cutting doesn’t produce the massive surge in demand that it did from the less-indebted household sector back in the early-2000s. Compounding the current market is household indebtedness, which remains relatively high, and this further dampens the interest rate cutting effect on housing demand.”

“The property market may ‘hope’ for interest rate cuts to boost short-term demand, and periodically, this happens, but in South Africa, new residential development remains mediocre. New residential units completed in 2023 were -34,9% down on 2019 levels, and we also have to factor in that many households are content to remain outside of the formal housing market.”

Bearing in mind that FNB only forecasts for the approaching three years, in the current slow growth economy, and with only limited interest rate reduction in the coming cutting cycle predicted (prime declining from 11,75% only as far as 10,5% is FNB forecast), Loos expects that it may take at least three years for building completions to grow back to a level exceeding the pre-Covid 19 levels. “FNB forecasts an average house price growth of 1,4% in 2024, accelerating to 3,8% by 2026. Such rates remain below forecast inflation, thus translating into a decline in real inflation-adjusted housing values.”

Loos also doesn’t believe that the elections will play a major role in the market’s performance in the next month or two. “We know that economic growth was a weak 0,6% in 2023, so not much help for the residential market from that. Some extra stimulus is expected from July onward, however, when FNB expects the start of a mild interest rate-cutting cycle. But no fireworks are expected.

“For us at Commercial Property Finance, this part of the market has weakened significantly since interest rates started to rise in 2021 and normally lags the recovery in the existing market. So I think we will have to wait until 2025 before the new development market turns noticeably stronger,” concludes Loos.


FNB spells out bad news for property in South Africa

FNB has revised its interest rate and GDP expectations downwards, resulting in a delayed housing market recovery in South Africa as tough times continue.

According to FNB senior economist Siphamandla Mkhwanazi, recent data suggests that economic activity in the US remains stronger and inflation stickier, relative to our earlier expectations.

He said the Federal Reserve has conveyed that it intends to maintain high interest rates until inflation is brought down to its target level.

As a result, FNB now anticipates that the US Fed funds rate will persist at a higher level for a more extended period, with the first cut being postponed from June to September.

The cutting cycle is also expected to be less aggressive in the near term than planned, with 75 basis points of cuts expected over the next year instead of the previously estimated 125 basis points.

In our local context, the South African Reserve Bank (SARB) strongly intends to shift the inflation objective from the current 4.5% soft target to 3%.

However, Mkhwanazi said the exact timing of the official adoption of this target is unclear.

Therefore, it is possible that interest rates may have to remain restrictive for a longer period of time in order to align policy with this lower target and manage inflation accordingly.

To account for these developments, FNB’s repo rate forecast has been adjusted to show a delayed and shallower cutting cycle.

“We have pushed out the first cut from July to November this year, with rates reaching 7.5% by the end of next year versus 7.0% previously,” said Mkhwanazi.

“Importantly, however, there is a downside risk to the repo rate over the medium-to-longer term as lower borrowing costs would be supported by SA being more competitive in capital markets,” he added.

“In addition, less exchange rate depreciation would support slower and more stable inflation, entrenching its fall towards 3% and reinforcing the path to structurally lower interest rates.

“So far, we see inflation averaging 5.2% this year and drifting lower to 4.7% and 4.5% in 2025 and 2026, respectively,” said Mkhwanazi.

Mkhwanazi noted that, given our updated interest rates view and weaker-than-expected economic activity during the first quarter, GDP growth projections have been tweaked slightly lower (by 0.1ppt) throughout the forecast horizon.

“We now expect growth to average 1.2% this year (1.3% previously) before lifting to 1.5% and 1.6% in 2025 and 2026, respectively,” he said.

According to FNB, this means the housing market recovery will be slightly delayed, and its growth trajectory will be slightly lower than previously expected.

Source: ooba May 13, 2024



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