Finally, some good news to celebrate. For us property investors, this is something we have been looking forward to for some time now. The South African Reserve Bank (SARB) has dropped the Interest Rates by 1%. The last time we saw rates at these levels was back in January 2014 when the rate was 8.5%. The current rate is now at 8.75%.
Interest Rates 2013 – 2020
Under any other circumstances, this would be an extremely bullish move. As the world is facing the biggest pandemic in the last century, the decrease in interest rate just provides South Africans with some relief.
Let’s dig a little deeper and look at it from some different angles.
The global crisis with the outbreak of the COVID-19 virus has caused the world to go into turmoil. At the time this article is published, in an attempt to suppress the spread of this virus, Europe is heading into lockdown, self-isolation and social distancing. This will result in an economic depression, the extent of which we have no way of guessing until we can see some light at the end of this tunnel.
South Africa has been more proactive in attempting to curbing the spread of this virus by implementing self-isolation and social distancing at a very early stage in the outbreak. This will hopefully reduce the spreading of the virus.
Companies are trying to implement a work-from-home strategy for their employees, but the vast majority of South Africans are wage earners and are required to be at their work. This is both to earn their wage and for the company to continue to produce or manufacture. Any way you look at it, the economic outlook is very bleak. The decision from SARB to reduce the interest rates has no bullish intent, but for economic survival. The majority of the worlds most important central banks have already cut their rates to near historical lows.
What does it even Mean?
In simplistic terms, the interest rate is what is used to calculate how much the monthly instalment is for paying back the debt that you have taken out. This could be your credit card debt, motor vehicle financing, your home loan mortgage bond or short-term unsecured loan. When the interest rate is reduced, the monthly instalment is reduced, and hence, your monthly expenses reduce.
South Africa has been in an economic downturn for several years now and with the ever-increasing costs, the consumer has been facing serious financial pressure. Let us not forget the increase in VAT by 1%, which meant that everything increased in price. The petrol price keeps increasing, municipal rates, levies and homeowners association fees keep increasing. But salaries aren’t going up and companies haven’t been able to pay bonuses. So how does one find any relief? Using credit cards to pay for monthly expenses?
When the SARB cut the interest rate by 0.25% in January 2020, this provided the slightest relief. You may be able to start (if you were smart) to put some extra money towards the debt that you’d taken out to survive.
A 1% drop in Rates in Substantial
- On a R1million home loan, this will save you R650 per month.
- The last time that the interest rate dropped by 1% in a day was in May 2009 when it dropped from 12% to 11%.
- That was more than 10 years ago.
“The best time to invest is AFTER you’ve gotten educated AND during a crisis.”
– Robert Kiyosaki, Rich Dad, Poor Dad –
We are property investors. When the interest rates are cut, we start to get excited. It means increased cash flow from properties. It means that affordability looks better to banks and thus banks would look to further lend money.
What it also points to is turning from a buyers’ market to a sellers’ market, which is not great if you are buying property, but it will point to capital growth in properties that you already own. We believe that it doesn’t matter what market it is, there are always plenty of opportunities.
Why would this happen? When interest rates are lower, individual’s affordability is better and this brings more buyers to properties and thus, the demand increases, driving prices up.
Unfortunately, with the current global situation, one would doubt that this cut would provide enough momentum to turn the market. It is also felt that once this pandemic is brought under control globally, the SARB would not hesitate to push the rates up again. This cut is after all emergency related.
We urge everyone to be safe in these turbulent times and practice good principles of self-isolation and social distancing. The Property Collab has cancelled all networking events until further notice.
We will be hanging out in our recently launched Online Property Forum. If you want to chat to the community about anything; properties, how to move forward in times of crisis or even how to keep growing whilst in self-isolation. Be sure to visit the forum and drop a note there. The Property Collab team and the community will be there to help and support you all the way.
Disclaimer: The views expressed in this article are those of the Author. Always seek professional advice before proceeding with any investment.