Repo Rate Cut: Ideal Investment Conditions
Category Investment
The South African Reserve Bank cut the repo rate to 3.75% last Thursday, 21 May 2020. The prime rate now sits at a 47-year low of 7.25%, which means that borrowing money is now cheaper than it has been in most buyers' lifetimes. These rate cuts, coupled with zero transfer duty for purchases under R1 million, could make this the perfect time to invest in real estate, especially at the lower end of the market.
For lower-income earners and first-time buyers, the key benefit of the drop in interest rates is that in many circumstances it will now be more affordable to purchase rather than to rent. The cuts also mean that they will qualify for higher home loans than they would have previously. The income required to qualify for a R500 000 home loan has declined from about R19 000 per month in early January to around R16 000 currently.
For those with existing bonds, the interest rate cut translates into monthly savings on bond repayments. These savings could be used to invest in a second buy-to-let or investment property. For example, a R3 million bond will now cost around R4 000 less per month. These savings could easily translate into a sub-R1 million investment (buy-to-rent) property.
In addition to the interest rate cuts, we can expect to see a drop in property prices as distressed owners and investors look to dispose of properties that they can no longer afford due to the general decline in the economy.
The demand for rental housing should remain relatively strong as many people will not be in the position to purchase or may not wish to do so at this time. Those who have had to sell their properties will still need accommodation and this could bolster the rental market. We expect there to remain a strong demand for residential rentals, especially in metropolitan areas and at the lower end of the market.
With the current low interest rates, lower and more negotiable property prices, and the on-going demand for affordable rental housing, it could be the perfect time to make an investment in the property market. This is especially so in the sub-R1 million sector as there will be no transfer duty payable on these purchases and there remains a strong rental demand in this sector.
Although there may be much uncertainty in the market at the moment, there are also some excellent investment opportunities available. If you are looking for an opportunity to make your move in the property market, then get in touch with us at Vertical Spaces Properties to discuss options.
Author: Richard Abrahams