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.” 

In its Weekly Economic Monitor, Nedbank CIB said the rand dropped sharply overnight, breaking through R18/$ as global risk aversion jumped after Israel bombed Iranian nuclear sites. It said the assault added to the tensions that simmered early in the week after the US and Iran failed to reach an agreement on the latter's nuclear programme with the 60-day deadline stipulated by US President Donald Trump.

“The local currency is trading around R17.96/$ this morning, its weakest level since 30 May. It touched R17.69/$ on Tuesday, its highest level since the second week of December, buoyed by investor demand for higher-yielding assets. Other emerging market currencies are also softer this morning.”

Unpacking significant global market events for the week, Bianca Botes, Director at Citadel Global said the US Dollar Index staged a sharp rebound in early trade, climbing above 98 after hitting a three-year low just a day earlier.

She said this turnaround was driven by investors seeking safety following Israel’s strike on Iran’s nuclear sites, which heightened global tensions.

“US officials clarified that America had no role in the attack. Before this, the dollar had been under heavy pressure due to President Trump’s aggressive trade threats and weaker-than-expected inflation, which increased expectations for Fed rate cuts,” Botes said. 

Meanwhile, the director said the euro surged to $1.16/€ - its highest level since late 2021 - as investors responded to diverging central bank policies and renewed fears over trade wars. The European Central Bank signalled a pause in rate cuts, while the Fed is expected to start cutting rates as soon as September, making European assets more attractive, as higher rates mean better returns on cash, she said. 

Botes said the British pound stayed near $1.35/£, close to a three-year high, benefitting from the weaker dollar. However, she said the UK’s economy showed signs of strain, with GDP shrinking by 0.3% in April, driven by higher living costs and taxes. Despite this, the BoE is expected to keep rates steady, while the UK government announced a major spending plan, she added. 

Citadel Global said the rand saw significant pressure during trade on Thursday/early Friday morning, coming off its recent highs and recent sideways trade.

“The weakness in the rand is largely driven by the rebound in the dollar, while increased geopolitical tension and renewed trade tensions drove flight to safe haven assets.”

Independent Media Property