‘All the people we speak to do believe that in 2024 we’re likely to see rate cuts of ideally somewhere between 50 basis points and 150bps. So I do think there will definitely be some respite next year as inflation reaches that mid peak,’ says Rhys Dyer, CEO of ooba Home Loans.
JEREMY MAGGS: A warm welcome and let’s start with this. The South African Reserve Bank [Sarb] announcing that the repo and prime lending rates will again be left unchanged at 8.25% and 11.75% respectively. Rhys Dyer, chief executive officer of ooba Home Loans, says attention should now be focused on rate cuts to ensure pressure on household finances and further motivate prospective home buyers in, what he terms, a sluggish economy.
He joins us now, and given that you believe rate cuts could motivate prospective home buyers in this stagnant economy, firstly, how significant a drop in rates would make a marked difference?
RHYS DYER: Jeremy, so when we went into that Covid period and rates dropped fairly significantly, as you recall, down to 7%, we saw an increase in our demand or application increase probably in the region, about 40-odd percent at those levels of interest rates. So it [the property market] is very, very sensitive to interest rates.
Already we’ve seen, even when… there’s been a pointer towards interest rates holding, many, particularly first-time home buyers, have decided to come back into the market, with a little bit of confidence that their repayment hopefully is not going to get any more expensive. So they’ve reached the top of the cycle. So it is very interest sensitive, but I think it’ll need another 1% or 2% to really get the property market stimulated again.
JEREMY MAGGS: Not necessarily realistic, though, in the current economic climate.
RHYS DYER: No, I think that’s correct. I do think that, I’m not an economist, but certainly all the people we speak to do believe that in 2024 we’re likely to see rate cuts of ideally somewhere between 50 basis points and (150bps). So I do think there will definitely be some respite next year as inflation reaches that mid peak. It’s that sort of 4.5% and below and yeah, we’ll see a bit more activity next year definitely.
JEREMY MAGGS: But increasingly difficult for prospective home buyers, and particularly as you say, in the early stages of getting into the market, given that consumers have got to manage the increased cost of living in tandem with home repayments, that squeeze is just getting tighter and tighter, isn’t it?
RHYS DYER: Yeah, that’s absolutely right. As part of the inflation increase that came through in August, I think that it ticked up slightly from 4.7% to 4.8%, one of the drivers of that was municipal rates. So we are definitely seeing those items of home ownership increasing and, in many cases, well ahead of the official inflation rate.
So yeah, home ownership and I guess in some cases whether you’re renting or buying, some of those costs are certainly escalating and making just living in a home significantly more challenging than it was a few years ago.
JEREMY MAGGS: Rhys, is the stress across all sectors of the home market?
RHYS DYER: I think certainly the more interest rate sensitive part of the market is the lower end of the market, so you’re definitely seeing less activity there and a lot more stress. But you’re chatting to the banks in terms of their credit loss ratios, it is fairly spread across the entire market, but definitely a little bit more pronounced towards the bottom end.
JEREMY MAGGS: There’s also this new trend of co-buying among friends and business partners in South Africa. Just explain to me again, what it is in simple terms and why it’s starting to find favour and if there are advantages in it.
RHYS DYER: It’s probably still in the early stages in the South African market, but it’s gaining a lot of momentum in the US market and we’re certainly seeing some of our banking partners adapting to bring out products to allow customers to do this.
So effectively what it allows, where often spouses will buy a property together and that’s fairly common, but what’s happening now is friends are getting together or potentially brothers and sisters and so on. So multiple applicants on a home loan and multiple people buying a property. So three, four, five and so on. Then obviously that significantly reduces the cost of ownership and allows for better affordability on home loans and debt and so on.
So that is definitely a much more common theme, as I say, mainly in the US and also driven by the same issue, cost of home ownership and cost of debt and interest rates at the moment.
JEREMY MAGGS: You can see the advantage to something like that, but it does come with its own set of risks, doesn’t it?
RHYS DYER: It does indeed. Especially when one party wants to sell, and the others don’t and so on. So we certainly advise our customers who are looking to do that to be very clear in terms of contracting upfront around how one deals with those issues. But yeah, even with a contract, it can be challenging at times, but I think for many people wanting to invest in property, certainly a great first step.
JEREMY MAGGS: And another advantage you’ll point out to me is the buy-to-let market hitting a new all-time high. Why is that?
RHYS DYER: Yeah, so I think it’s probably a mix of business issues. So where first-time home buyers were a bigger percentage of our market two years ago when interest rates were low, we’re seeing that shift with less first-time home buyers and more buy-to-let homeowners coming through. I think it’s just a function of interest rates. But also, we’ve definitely seen a massive change in the Western Cape.
So whilst our overall numbers across the country are around about 10% of our applicants are people buying a property for investment, in the Western Cape that’s jumped up to about 35%.
So 35% of our applications in the Western Cape are people buying investment properties and that’s the highest it’s been I think ever in our 20-odd year history.
So I think just pointing to people from all around the country seeing value in property in the Western Cape and allocating investment and funds down to that province. It’s a marked difference.
JEREMY MAGGS: It’s not only value in the Western Cape, of course, because it also talks to general hesitancy in the home buying market in other parts of South Africa and attributed to social and, I guess, political uncertainty.
RHYS DYER: One hundred percent. Yeah, if you look at our buy-to-let stats in Gauteng, as an example, it’s less than 5% of people are buying buy-to-let properties in Gauteng. So it is definitely driven by those issues and I think the Western Cape has been the beneficiary of some of those challenges in other provinces.
JEREMY MAGGS: Rhys, people are becoming better at long-term financial planning, you’ll tell me, because first time home buyers, let’s get back to them, are also prioritising deposits.
RHYS DYER: When we were in that low interest rate environment, I think our average deposit was about 4%, 5%. That’s headed up close to about 10%, 11% now. It’s a combination of two things. So where you can put down a deposit, definitely the bank will look at you slightly more favourably and you’ll get a better rate from a bank. So there’s that advantage, especially over a 20-year term.
But then also in some cases without the deposit, the customer just doesn’t have the affordability to repay the home loan. So in some cases, it’s almost forced where if you don’t have the deposit, you’re not going to get the home loan. So it’s a combination of those things, but we’re definitely seeing more and more customers applying deposits and clearly that helps from a rate perspective.
JEREMY MAGGS: And just a quick one, in conclusion, if you can look into your crystal ball, we’ve spoken about the resilience of the home loan market, are you able to look out 18 months, two years and give me a sense of where things might be, considering as we started this conversation with potential interest rate cuts, but also ongoing inflationary pressure?
RHYS DYER: Yeah, Jeremy, the two years over Covid, 2020 and 2021, I think were exceptional years for the property market. I don’t think we’re going to see those years return in terms of volumes again soon. What we were seeing in 2017 to 2019, I think we’ll get back there.
I think we’ll see in terms of activity from where we are now, probably a 10% to 15%, even potentially 20% pickup over the next 18 months to two years. But it’s still not a hugely active market relative to where we were, back two years ago.
JEREMY MAGGS: Rhys Dyer, thank you very much indeed.
Still looking for your dream home, or wanting to rent or sell? Feel free to give one of our developers a call today.
Tom Eastwick – The Gates, Hilton and Garlington, Hilton | 072 297 2699 | tom@devdirect.co.za
Janet Channing – Waterford Residential Estate, Howick | 082 570 5834 | janet@devdirect.co.za
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