Will lower interest rates drive buy-to-let investment in South Africa?

Source: ChatGPT.

“2024 was another big year for South Africa’s property rental market, with all major regions registering positive growth,” shares Grant Smee, chief executive officer of Only Realty Property Group, pointing to June 2024 when rental growth outpaced inflation for the first time in nearly five years, increasing by 5.2% year-on-year.

“The country’s most expensive province, the Western Cape, saw a rental growth rate of 9.7%, narrowly outperformed by the country’s front runner, the North West by just 0.1%. Conversely, Gauteng and KwaZulu Natal registered some of the lowest growth rates.”

StatsSA's Household Survey revealed a notable increase in the percentage of households opting to rent, climbing from 17.7% in 2020 to 23.9% in 2022. Building on this trend, TPN reported a slowdown in rental escalations to 4.29% in Q2 2024, further reinforcing the growing shift toward renting.

“Rental properties provide flexibility, lower overhead costs and give tenants access to areas and homes that might otherwise be unaffordable if purchased. This is especially true in gated estates, where monthly levies can reach tens of thousands of rands,” explains Smee.

Will rate cuts impact the performance of the buoyant rental market?

“While the rate cuts coming into play are notable, we are still a long way off the multi-decade lows of 2020,” he says. “In addition, many potential homebuyers are grappling with the high cost of living and reduced savings.”

Smee adds that financial stability and savings are two important considerations for any lender approving a home loan. “There is also generally a requirement to put down a deposit and without ample savings, this is not always possible.”

He does, however, add that for those with some liquidity, lowered interest rates may draw in buy-to-let investors who have been waiting in the wings.

“Buy-to-let investors are on the rise – particularly in the Western Cape – where there is high demand. For those who have been waiting, now is a good time to secure a property that covers the bills and can potentially yield additional income,” says Smee.

“It's also an opportune time for investors wanting to expand their portfolios and for property owners wanting to upscale.”

Overall, Smee believes that the advantages of interest-rate cuts far outweigh any potential downfalls. “While areas privy to high levels of rental property vacancies such as Gauteng may feel the impact more than others, it will certainly offer some benefits too.”

Smee highlights one potential drawback of the current climate for tenants, saying: “For those who own a home, the benefits of rate cuts are immediate. For tenants on the other hand, the financial benefits will most likely not be felt at all.”

Tips to go from renting to buying:

For those looking to capitalise on a year of interest-rate cuts, Smee offers four tips:

• Know your credit score: Your credit score tells the bank whether you can repay your debts on time and - without a good credit score - you will not be approved for a home loan. A number over 610 is generally acceptable and nothing less will suffice.
• Research: Once you know your credit score and what you can afford, get to know what’s available. Set some alerts so that you have an idea of property prices in your desired area (and within your range of requirements) and become more knowledgeable on the market. Understanding the market will provide you with better leverage in a case where you may need to negotiate.
• Start saving: Home loans are expensive and paying them down quickly will make you more financially resilient in times of high interest rates. Remember, interest rates do fluctuate so you need to understand best- and worst-case scenarios when it comes to your repayments.
  I recommend that potential buyers set up a separate account for savings, preferably a fixed, interest-earning account. This way, you can’t touch the money and it starts to grow as it earns interest. I would also advise that you set up an automatic debit order so that it becomes routine.