Rate cuts ‘will take time to filter through to residential property market’

The residential property market is set for a slow recovery after last week’s interest rate cuts that could also spur activity in the Johannesburg market, which has been moribund over the past decade.

Landsdowne Property Group said recovery in the residential property market would take time even as the interest rate cuts and declining inflation are expected to boost the sector. 

“During the past year, activity in the property market has stalled as consumers remain under significant financial pressure on all fronts," Landsdowne founder and CEO Jonathan Kohler said.

“Disposable household income has not only had to contend with a higher-for-longer interest rates but also significant increases in electricity rates, food and transport costs."

The US Federal Reserve cut its benchmark rate by half a percentage point, prompting the Reserve Bank to cut its repo rate by 25 basis points last week to 8%.

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

Prudent investors can find value, particularly if the cycle of interest rate cuts persists, along with the ongoing positive sentiment regarding the overall economic outlook for the country and Johannesburg, Kohler added.

According to Stats SA, residential property prices in Cape Town increased by nearly 6% in the year to March. Prices in Johannesburg declined 1.3%, a performance that was worsened by the city’s unreliable water supply.

“The recent house price trends suggest that Cape Town, like all other metros, is experiencing slowing house price growth," FNB senior economist Siphamandla Mkhwanazi told Business Day. However, longer-term trends indicate Cape Town has outperformed other metros, including Johannesburg over the past 15 years."

Mkhwanazi said the Cape Town property market has benefited from an influx of affluent individuals from inland regions and a relatively weaker rand has made high-end property more attractive to expatriates and foreign buyers.

“Looking at interest rates, the differentiating factors are more structural than cyclical. As such, it is unlikely that interest rates will materially change these trends. For the gap to close we will have to see a step-change in sentiment, the quality of local government administration, and the overall investment trend," Mkhwanazi added.

Kohler views lower inflation rates as a factor that will boost demand for property, making home loans more affordable as banks ease their repayment terms. However, he added that it will take time for a sellers’ market to emerge given that several significant challenges 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 50 basis-point drop-in interest rates will take time to reflect in demand for new homes, as consumers will likely first settle more expensive credit card and other debt,” he said.

Prospective homebuyers will also need to factor in continued rates and utility increases and looming water-shedding that will require additional capital outlay, Kohler added.

For this reason, he believes many consumers will still favour renting because as monthly costs are mostly fixed, shielding tenants from major price increases.

majavun@businesslive.co.za