How lower interest rates could boost house prices in South Africa
The depressed state of new residential building plans passed in most of the country's larger municipalities is likely to lead to a meaningful recovery of house prices as soon as demand recovers on the back of lower interest rates.
Responding to an Independent Media Property enquiry, economist Dr Roelof Botha said although the residential property sector has welcomed the latest rate cut, the prime overdraft rate needs to be reduced by at least another 125 basis points for a sustained recovery.
'Hopefully, the Monetary Policy Committee (MPC) will become more aware of South Africa's most pressing economic policy objective, namely, to stimulate growth and employment creation,' Botha said.
He said that in order to shed some light on what may be expected at the July MPC meeting, it is useful to reflect on the sterling performance of the rand.
'In its regular monetary policy statements, the MPC invariably addresses the issue of currency weakness, which leads to higher rand-denominated imports and adds to inflationary pressures - both directly and indirectly via the higher cost of intermediary inputs in manufacturing and other industries.'
Botha said the news on this front is exceptionally good. With both the nominal and real exchange rates of the rand exhibiting strength, he said it is clear that domestic inflation is not being threatened by currency weakness, which should lead to further interest rate cuts in 2025.
Botha said that between the end of 2019 and the first quarter of 2022, average home prices were rising at a marginally higher rate than building costs. He said parity in the annualised rate of change in the construction input price index (CIPI) and the BetterBond home price index was achieved in the second quarter of 2022, due to the negative effect of record high interest rates on the residential property market.
'Since then, the trend has been reversed, with both the CIPI and the BetterBond home price index increasing at lower rates than the consumer price index (CPI). At the end of the first quarter of 2025, the YOY increase in house prices was marginally negative, with the CIPI increasing by merely 1.5%, which is negative in real terms.'
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
IOL News
a day ago
- IOL News
How lower interest rates could boost house prices in South Africa
The depressed state of new residential building plans passed in most of the country's larger municipalities is likely to lead to a meaningful recovery of house prices as soon as demand recovers on the back of lower interest rates. Responding to an Independent Media Property enquiry, economist Dr Roelof Botha said although the residential property sector has welcomed the latest rate cut, the prime overdraft rate needs to be reduced by at least another 125 basis points for a sustained recovery. 'Hopefully, the Monetary Policy Committee (MPC) will become more aware of South Africa's most pressing economic policy objective, namely, to stimulate growth and employment creation,' Botha said. He said that in order to shed some light on what may be expected at the July MPC meeting, it is useful to reflect on the sterling performance of the rand. 'In its regular monetary policy statements, the MPC invariably addresses the issue of currency weakness, which leads to higher rand-denominated imports and adds to inflationary pressures - both directly and indirectly via the higher cost of intermediary inputs in manufacturing and other industries.' Botha said the news on this front is exceptionally good. With both the nominal and real exchange rates of the rand exhibiting strength, he said it is clear that domestic inflation is not being threatened by currency weakness, which should lead to further interest rate cuts in 2025. Botha said that between the end of 2019 and the first quarter of 2022, average home prices were rising at a marginally higher rate than building costs. He said parity in the annualised rate of change in the construction input price index (CIPI) and the BetterBond home price index was achieved in the second quarter of 2022, due to the negative effect of record high interest rates on the residential property market. 'Since then, the trend has been reversed, with both the CIPI and the BetterBond home price index increasing at lower rates than the consumer price index (CPI). At the end of the first quarter of 2025, the YOY increase in house prices was marginally negative, with the CIPI increasing by merely 1.5%, which is negative in real terms.'
Daily Maverick
3 days ago
- Daily Maverick
Three Cheers for Three Percent: Re-anchoring Expectations in the South African Macroeconomy
The ongoing discourse surrounding a downward revision of the inflation target to a proposed point target 3.0%, has gained significant momentum following the May 2025 MPC statement. The Governor's language, suggesting such a change is nearing inevitability, reflects both technical, research-based consensus and evolving macroeconomic realities. In this article I offer some empirical and theoretical rationale for such a policy shift, focusing on its implications for yield curve dynamics, term premia and macroeconomic performance, while anchoring the argument in some popular econometric decompositions of the 10-year nominal bond yield. A cornerstone of the SARB's justification is the view that a lower inflation anchor promotes more favourable currency dynamics through both real and nominal channels. The SARB's own Quarterly Projection Model (QPM) simulations indicate that a credible downward revision of the target reduces expected inflation differentials with South Africa's trading partners, thereby fostering real exchange rate appreciation. A more competitive real exchange rate contributes to cheaper imported inputs, lowers domestic cost pressures, and ultimately deepens trade linkages. This appreciation is not merely mechanical. It is conditional on perceived credibility. As the SARB's working papers on the topic reveal, markets respond to a credible policy signal by re-weighting expectations of future average inflation, risk premia (including term premia and inflation-risk premia), and macro-volatility. In a series of demonstrated scenarios, the SARB shows that a 3.0% inflation target lowers the probability of inflation overshoots, narrows the confidence bands around forward inflation projections, and supports an appreciation of the rand in equilibrium. Such currency effects play a non-trivial role in aggregate demand dynamics. Lower expected inflation tightens the domestic-foreign interest rate spread via uncovered interest parity relationships and strengthens capital inflows. Notably, the Quarterly Projection Model includes a more complete uncovered interest parity condition that links real interest rate differentials, inflation expectations, and term premia. As fiscal credibility is enhanced and inflation is better anchored, the neutral real rate itself declines, supporting a more accommodative stance even as nominal policy rates remain unchanged. From a debt sustainability perspective, the commonly voiced concern is that tighter inflation targeting could elevate real interest rates and suppress growth, thereby worsening debt-to-GDP ratios. However, this argument presumes static risk premia, and fixed growth dynamics. When explicitly modelling the feedback between the fiscal balance and macroeconomic variables, analysis reveals that lower inflation expectations reduce risk premia and debt-service costs, especially on long-dated sovereign debt. This attenuates the risk of a deteriorating debt path. At the core of theoretical descriptions of the term structure of interest rates is the Expectations Hypothesis, which can be described somewhat informally by stating that the expected return from holding a long-dated bond of a given maturity should be the same as the expected return from rolling over a series of shorter-dated bonds for the same total maturity, or, more concretely, there should be no additional expected compensation (for example) priced in for the investor in a 10-year bond, than for an investor who embarks on a strategy to buy a series of 1-year bonds, rolling them over ten times consecutively. Traditionally viewed within the framework of the expectations hypothesis, the term premium encapsulates deviations from the hypothesis as it accounts for the uncertainty surrounding future short-term interest rates and economic factors that might impact long-term bond returns. Therefore, term premia are pivotal for central banks and financial institutions, as they provide insights into market expectations and the risk landscape within long-dated securities. Several competing econometric routines for term premia estimation have emerged in the relevant literature, but a particularly attractive one is that of Adrian, Crump, and Moench of the Federal Reserve Bank of New York, henceforth ACM. The graph below shows the decomposition of the 10-year yield into its constituent components using the ACM procedure: Adrian, Crump and Moench. From the diagram shown, on the assumption of a shared market assessment of credibility regarding the SARB, by lowering the official inflation target, the average expected inflation (last node on bottom-right of diagram) will gradually move towards the communicated 3.0% level, pulling the overall 10-year bond yield down along with it, ceteris parabus. In addition, empirical literature reveals that the inflation risk premium (top-right of diagram) is lower in regimes where average expected inflation is lower. The inflation risk premium, is, informally, something of a 'hazard based' compensation which the market demands as protection for inflation that may spike at times when the marginal utility of consumption is high (economic downturns). Moreover, the ACM framework and its associated literature empirically supports the view that term premia are sensitive to changes in the perceived stability of macroeconomic policy. The SARB's simulation exercises suggest that a more credible inflation target leads to tighter pricing of currency forward rates, lower volatility in excess returns, and enhanced arbitrage conditions across the yield curve. Such developments not only anchor inflation expectations but also reduce the expected compensation investors require for bearing duration risk. The so-called 'sacrifice ratio', or the GDP cost of reducing inflation, is often invoked in policy debates. However, empirical estimates (such those provided by the SARB themselves) for South Africa suggest that this ratio is comparatively low. As they note, the transmission from policy rate increases to output is dampened by the weak investment multiplier and a limited credit channel. As such, the disinflationary cost of moving from 4.5% to 3.0% is modest, relative to long-term gains in lower macro-volatility, tighter risk premia, and a more stable fiscal outlook. A further misconception is that a lower inflation target necessitates an uncomfortably higher path for the policy rate, and by extension, popular consumer credit rates. While this may hold mechanically in the short run, but interaction between central bank credibility, inflation expectations, and neutral real interest rates alters the equilibrium dynamics. In particular, the updated QPM includes a revised Taylor Rule that adjusts the policy stance not merely to inflation deviations, but also to movements in fiscal risk premia and global financial conditions. Under this richer framework, the policy rate need not increase materially to maintain a 3.0% inflation path. An additional layer of support comes from external benchmarking. Compared to emerging market peers, many of whom operate with 3.0% or even 2.0% inflation point targets, South Africa's 4.5% midpoint appears uncomfortably high. A floating bar chart of inflation target ranges, reconstructed from a recent peer comparison, reveals South Africa as something of an outlier. In targeting a lower rate, SARB would be moving into alignment with countries like Thailand and Chile, jurisdictions with stronger currency performance and lower sovereign spreads. Moreover, a lower inflation target enhances the SARB's ability to conduct countercyclical policy. As the lower bound on nominal interest rates becomes less binding, the central bank gains more policy space to respond to adverse shocks. This is particularly valuable in a global environment of volatile capital flows, asymmetric shocks, and rising geoeconomic fragmentation. In the context of South Africa's high unemployment and fragile growth, the case for 'expansionary disinflation' may seem counterintuitive. But as the SARB working papers stress, credible disinflation raises expected returns to investment, reduces the cost of capital, and improves budgetary outcomes by lowering interest burdens. In this sense, disinflation becomes a mechanism for reducing real distortions rather than amplifying them. One of the clearest benefits of improved inflation credibility is its impact on wage and price setting. Lower forward-looking inflation expectations enter directly into the wage bargaining process. This contributes to more stable unit labour costs, improved competitiveness, and less risk of cost-push spirals. These real effects are substantial and accumulate over time. Fiscally, the gains are self-reinforcing. As nominal GDP stabilises and interest payments fall, the primary balance improves. This reduces the borrowing requirement, compresses sovereign spreads, and ultimately reinforces the very dynamics that sustain the new inflation target. The SARB's internal simulations show that under a 3.0% objective, debt/GDP remains stable or declines in the outer years, which is an outcome driven not by fiscal consolidation, but by improved macro stability. A final benefit is reputational. Central banks that deliver on ambitious but credible targets enhance their standing in international capital markets. The rand's volatility, an enduring concern for global capital allocators, is dampened by tighter inflation targeting, improving the appeal of rand-denominated assets. The ACM research literature and associated yield decompositions confirm that a lower inflation target leads to flatter term structures and narrower risk premia. In conclusion, the move to a 3.0% inflation target constitutes a structural enhancement to South Africa's macro-financial framework. It tightens the link between policy credibility and financial market outcomes. Far from suppressing growth or worsening fiscal conditions, it unlocks a virtuous cycle: lower inflation expectations, stronger currency, reduced premia, and enhanced trade competitiveness. The SARB's own models, supported by international evidence and term structure theory, affirm that this path is not only feasible, but desirable. DM Author: Reza Ismail, Head of Bonds at Prescient Investment Management Disclaimer: Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. No action should be taken on the basis of this information without first seeking independent professional advice. The information contained herein is provided for general information purposes only. The information and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any document released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit
IOL News
3 days ago
- IOL News
South Africa's rental market sees it's strongest growth since 2017
South Africa's rental market kicks off 2025 with impressive growth Image: Freepik South Africa's residential rental market has entered 2025 on a high note, exhibiting its most robust performance in years, according to the latest findings from the PayProp Rental Index. In the first quarter of 2025, average national rental growth climbed to an impressive 5.6%, marking the strongest quarterly increase since the third quarter of 2017. This surge pushed the average rent to R9,132, with growth reaching its pinnacle in February, when a year-on-year increase of 6% was recorded—the highest monthly growth since August 2017. This remarkable rental growth coincides with a favorable inflation landscape, as CPI inflation dipped from 3.2% in January and February to 2.7% in March. This falling inflation has created a notable gap of 2.8% between rental growth and inflation during February and March, representing the most significant real-terms rental gain witnessed in the current growth cycle. The momentum has been largely attributed to strong tenant demand coupled with provincial growth, allowing landlords to recuperate losses suffered during recent slowdowns. Stable arrears figures offer cautious optimism Unlike previous years, the first quarter of 2025 did not experience a seasonal spike in rental arrears, with the percentage of tenants in arrears decreasing slightly to 17.0%. This figure matches a record low first recorded by PayProp in the last quarter of 2023. André van Rooyen, Head of Sales at PayProp, said after last year's first-quarter arrears spike, this stable start to 2025 is encouraging. However, he added that with rents rising at a brisk pace, he emphasised the importance for rental agents to reassess tenant affordability during lease renewals. Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Advertisement Video Player is loading. Play Video Play Unmute Current Time 0:00 / Duration -:- Loaded : 0% Stream Type LIVE Seek to live, currently behind live LIVE Remaining Time - 0:00 This is a modal window. Beginning of dialog window. Escape will cancel and close the window. Text Color White Black Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Background Color Black White Red Green Blue Yellow Magenta Cyan Transparency Opaque Semi-Transparent Transparent Window Color Black White Red Green Blue Yellow Magenta Cyan Transparency Transparent Semi-Transparent Opaque Font Size 50% 75% 100% 125% 150% 175% 200% 300% 400% Text Edge Style None Raised Depressed Uniform Dropshadow Font Family Proportional Sans-Serif Monospace Sans-Serif Proportional Serif Monospace Serif Casual Script Small Caps Reset restore all settings to the default values Done Close Modal Dialog End of dialog window. Next Stay Close ✕ While inflation has remained subdued so far this year, rising electricity tariffs and escalating fuel costs pose potential challenges, threatening to influence official inflation figures and, consequently, tenant affordability in the months ahead. The PayProp State of the Rental Industry report revealed that approximately 80% of rental agents report tenant movement driven by affordability concerns. Presently, the average rent-to-income ratio stands at a manageable 28.8%—below the recommended maximum of 30%. However, landlords renting higher-end properties may need to adopt cautious pricing strategies, preventing the limitation of their prospective tenant pool. Provincial performance shows varying levels of growth The growth in South Africa's rental market is not uniform across provinces. In Q1, Limpopo emerged as one of the fastest-growing markets, achieving a remarkable rental increase of 10.9%, just shy of its stellar performance in Q4 2024 and bringing its average rent to R8,899. The Free State showed resilience, more than doubling its Q4 2024 growth rate to 7.6%, pushing its average rent to R7,453 and surpassing the Eastern Cape. Conversely, Gauteng experienced a slowdown in rental growth, dipping to 2.9%, its weakest performance in over a year, and raising questions about its ability to maintain the third position for average rent at R9,201. Mpumalanga also faced challenges, recording the lowest rental growth in the nation at just 1.1%, with rents only rising by R91 year on year. Meanwhile, the Western Cape continues to command the highest average rent in South Africa at R11,285, although rental growth has decreased slightly to a robust 9.6%. KwaZulu-Natal maintained a steady but below-average growth rate of 4.5%, sitting just R31 shy of Gauteng's average rent, suggesting a potential shake-up in future rankings. The Northern Cape has finally shown signs of improvement, with rents rising by 3.3% after a slow performance last year. In contrast, the Eastern Cape's modest bounce back to 4.4% was insufficient to maintain its ranking, landing it the second-lowest average rent in the country. As the market progresses into the next quarter, van Rooyen observes a landscape filled with potential but also challenges, asserting, 'While landlords and agents are benefiting from stronger demand and healthier returns, it's critical that we remain focused on tenant affordability and long-term sustainability.' IOL
