Potential Impact of Lower Interest Rates on the South African Housing Market

The South African residential property market has faced challenges throughout 2023 and 2024, primarily due to the impact of interest rates at a 15-year high. A decline in sales transactions has been a direct consequence. However, recent global trends, including widely expected decreases in interest rates, have instilled optimism within the local property industry as we wrap up 2024 and move forward into 2025 and 2026.

Forecasts on the 19th of September’s imminent interest rate drop by the SA Reserve bank’s MPC varies between a 0,25% reduction to a more meaningful and optimistic 0,5%, which will bring the prime rate down to 11,25%.

A lot will logically depend on what the USA’s expected interest rate cut on the 18th of September will be. Locally the scene has been set by the new and stabilizing GNU (Government of National Unity) and the lowered inflation rate.

Interest rates (affordability) is however just one of the pillars of a healthy housing demand. A meaningful slowdown in home price appreciation has taken root across South Africa – except for the Western Cape, which are the only province where house prices have been increasing over the last few years by more than the inflation rate, due to a rise in demand and an extraordinary influx of people (so-called semi-grants).

Rate cutting will likely not 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. According to John Loos (FNB Economist), new residential development in South Africa remains mediocre.  New residential units completed in 2023 were -34,9% down on 2019 levels.

Despite a lack of proper local governance in most municipalities outside of the Western Cape, housing will always remain a basic need, which demand will grow with an increase of affordability. Developers in especially Gauteng is expected to be gearing up or planning to gear up for the increase in demand during 2025/6. South Africa is in the midst of a housing crisis, with an estimated backlog of 2.3 million units. A high demand for affordable housing means property investors will have no problem finding tenants.

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.

Effect of a possible interest rate reduction on 18 September 2024:

1. Monthly Repayment Savings

To calculate the monthly home loan repayment savings, you will need to use a mortgage calculator or amortization schedule for each scenario. Here is a breakdown of the calculations, based on a 20-year repayment period:

1.1       Scenario 1: R1 000 000 loan, interest rate drops by 0.25%: 

•           Original interest rate: 11.75%

•           New interest rate: 11.50%

Using a mortgage calculator, you'll find:

•           Monthly repayment at 11.75%: Approximately R10,888

•           Monthly repayment at 11.50%: Approximately R10,680

•           Monthly repayment savings: R10,888 - R10,680 = R208

1.2       Scenario 2: R1 000 000 loan, interest rate drops by 0.5%:

•           Monthly repayment at 11.75%: Approximately R10,888

•           Monthly repayment at 11.25%: Approximately R10,480

•           Monthly repayment savings: R10,888 - R10,480 = R408

 
2.      Total Interest Savings Over 20 Year Period On A R1 Million Home Loan:

2.1       Scenario 1: Interest rate drops by 0.25% to 11,5%

Total interest paid at 11.75%: Approximately R1,461,692

Total interest paid at 11.50%: Approximately R1,412,284

Interest savings: R1,461,692 - R1,412,284 = R49,408

2.2       Scenario 2: Interest rate drops by 0.5% to 11,25%

Total interest paid at 11.75%: Approximately R1,461,692

Total interest paid at 11.25%: Approximately R1,363,076

Interest savings: R1,461,692 - R1,363,076 = R98,616

Please note that these are estimations, and the actual savings may vary slightly depending on the specific terms and conditions of your loan.

It is always recommended to consult with a mortgage originator or use our CCH mortgage calculator to get the most accurate figures for your individual situation.