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Drop in interest rate a welcome surprise

Along with many South Africans, BondExcel has been pleasantly surprised at the Reserve Bank Monetary Policy Committee’s decision to cut the repo rate by another 100 basis points, after a similar-sized cut less than a month ago, on 19 March. This takes the repo rate down to 4.25% and the prime lending rate to 7.75% from 8.75%.

 

This brings another bit of relief for consumers at a time when they need all the help they can get, given the two-week extension of the lockdown in South Africa, until end-April. Beyond our borders, the universally negative impact of the COVID-19 pandemic on economies across the globe is there for all to see. The uncertainty surrounding the Coronavirus outbreak shows no signs of abating and therefore all liquidity measures are to be applauded and supported.

Consequently, BondExcel is throwing its weight behind the BetterLife Group’s initiative to prop up the real estate industry in our country with measures that go even further than decisive interest rate cuts, even though these are undoubtedly a step in the right direction. Additional strategies will be needed to secure the long-term survival of the industry, one of which could be to suspend the transfer duty on property up to a certain value.

The threshold on transfer duty currently stands at R1 million. Raising this bar to R3 million for a period such as six months (possibly with the option of adding another after six months), could mitigate the risk of the industry contracting significantly as we emerge into what will almost certainly be a slow economic recovery.

The savings outlined in the table below show that the positive impact for individual buyers could be significant. It could mean the difference between having both the confidence of their convictions, as well as the financial means, to buy a property they have their eye on, while government’s loss of income is set to be relatively low, given we would be working within a limited timeframe.

This 1% drop in the interest rate allows for significant savings in the long term as shown in the table below, with calculations based on a 20-year loan period:

While there will be a loss of government revenue in direct collection of transfer duties, a far broader benefit would accrue by way of tax collections from scores of players in and around the property industry, who would be involved in the many aspects of each transaction. Revenue collection would be positively impacted through the knock-on effects of such measures and could even stretch as far as Capital Gains Tax, payable on properties sold, if such a stimulus was to be implemented.

A second measure that could go a long way in keeping the property sector ticking over is to reopen Deeds Offices around the country for the remainder of the lockdown, albeit at reduced capacity.

Thousands of transactions are currently on hold, with Deeds Offices closed. This means a dramatic loss of income for the thousands who are directly, or indirectly, involved in related sectors and services. There is also the backlog that will need addressing once Deeds Offices are able to reopen, bringing additional strain to bear on the system.

In a typical month, the number of mortgages registering at Deeds Offices across our country, is in the region of 10 000 to 12
000. The property sector contributes significantly to our GDP as evidenced by the fact that the Deeds Office processed R12 billion in registrations in April 2019.

BondExcel therefore adds its voice to that of the BetterLife Group in calling on government to give urgent consideration to these two proposals.

The lower interest rate does stimulate the economy, and in particular the property sector, but these unprecedented times call on all of us to do more.