Residential property market outlook
Annual house price growth moved lower in January
Annual growth in the FNB House Price Index moved slightly lower in January, to 2.7% y/y from 2.9% in December (Figure 1). Segmented data shows that the slowdown is broadbased across price segments and major cities (Figure 2). The slowing price growth trend reflects relatively softer demand amid higher living costs and deteriorating affordability. We anticipate house price growth of around 2% this year, versus 3.5% and 4.2% in 2022 and 2021, respectively. Price growth should start lifting in 2H24, as interest rate pressures ease and marginal buyers return to the market (Figure 3).
Inflation and interest rates: SA not bucking the global trend
In line with global trends, domestic headline inflation is expected to fall to 5.8% in 2023 from 6.9% in 2022, due to easing global supply chain bottlenecks and slower fuel and food price inflation. We also need consider the impact that EU sanctions on Russian oil products and export restrictions in food markets could have on prices. In South Africa, production issues related to electricity constraints will likely prolong the hurdle of elevated input costs and may result in the reduced supply of some goods, which ultimatelty exerts upward pressure on retail prices.
While monetary tightening continues in advanced economies, hikes are likely to become shallower as inflation slows. We expect the local repo rate to peak at 7.5% in 1Q23 and remain stable for some time, as the central bank waits for evidence that inflation and inflation expectations are anchored around the 4.5% target before making any meaningful interest rate cuts.
Home buying activity to soften; price growth should stabilise
As affordability becomes more stretched, we expect home buying activity to decrease in the coming months. In particular, the steep interest rate hiking cycle and elevated inflation have eroded affordability, making it difficult for buyers to save enough for a down payment. To overcome this, anectdotal evidence suggests that some first-time buyers have turned to unsecured lending to fund their upfront deposit. Additionally, there has been an increase in reliance on government subsidy programs such as the Finance Linked Individual Subsidy Program (FLISP) to help these buyers enter the market (Figure 4). Internal mortgage applications data further supports the rising popularity of home loans with lengthier payment periods (>20 year bonds), more prominently among lower income earners (Figure 5). Notably, however, homeowners have an inclination to pre-pay their mortgages. In 4Q22, the average holding period for a mortgage was around 92 months (seven years and six months) (Figure 6), but lengthens to 119 months (approximately 10 years) for more affordable properties.
Mitigating against the weaker fundamentals are factors such as changes in consumer preferences due to the pandemic, structurally improved affordability, credit availability and a higher household formation rate. Additionally, debt-to-income and debtservicing ratios remain low by historical standards, and lenders are expected to be more competitive and offer more affordable options to attract customers, countering the effects of higher borrowing costs. Non-labour income is also expected to remain relatively supportive of activity in higher-income market segments.
Below, we summarise our segment views:
The affordable market: This year, we anticipate a decline in volumes and price growth as households face financial strain. However, some lenders are putting more focus on this market and introducing innovations to improve affordability, such as longer mortgage terms, collective buying options, and more streamlined administration of FLISP. Additionally, volumes will benefit from people moving from high-priced properties due to rising debt costs. Despite the expected downward pressure on prices, the persistent shortage of housing and strong desire for home ownership will partially offset it.
Middle priced segments: The latest employment data showed a positive surprise with job gains, however, the majority were low-quality jobs. This, combined with the ongoing global economic slowdown, increases the likelihood of a downturn in activity. As a result, we anticipate a decrease in buying activity. However, stable interest rates and increased competition in credit markets should help support activity. Additionally, modest household savings may provide some relief against rising living expenses.
Affluent markets: After a productive 2021 and 2022, marked by favourable pricing, a robust recovery in non-labour income, improved balance sheets in the aftermath of the pandemic, and the rise of remote work, we predict a decrease in buying activity in 2023, in part due to a drop in buyer confidence. However, supply-side factors may mitigate the impact on price growth. Sales related to emigration have slowed, and construction of new housing units should continue to decline.
Rental market: constrained household budgets may scupper the recovery
While the latest print surprised to the downside, rental price inflation is gradually recovering. We expect rental inflation to crawl higher to 2.6% on average in 2023, from 2.2% in 2022 and 0.9% in 2021. Overall, rental inflation remains much lower than headline inflation, reflecting relative slack in the market, with demand still recovering from the adverse effects of the pandemic. Vacancy rates have dropped from a peak of 13.3% at the height of the pandemic, to 8.3% in 4Q22, according to data from Rodes and Associates. Still, vacancy rates remain higher than the pre-pandemic level of 7.5% in 1Q20. The potential conversion of office space to residential rental space, particularly in areas with high office density, may keep vacancies elevated. From a demand perspective, the slow pace of employment and real wage growth, the sensitivity of renters to price increases and the risk of delinquency for landlords are a cause for concern. These factors will likely keep a tight lid on rental escalations in 2023.
ADDENDUM – NOTES:
Note on The FNB House Price Index:
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well-known Case-Shiller methodology which is used to compile the Standard & Poor’s Case-Shiller Home Price Indices in the United States.
This “repeat sales approach” is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month’s sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB’s own valuations database, thus based on the residential properties financed by FNB.
We apply certain “filters” and cut-offs to eliminate “outliers” in the data. They main ones are as follows:
- The maximum price cut-off is R15m, and the lower price cut-off is R20 000.
- The top 5% of repeat sales price growth rates, and the bottom 5% of growth rates are excluded from the data set.
- Repeat transactions that took place longer than 10 years after the previous transaction on the same home are excluded, as are repeat transactions that took place less than 6 months after the previous transaction on the same home.
- The index is very lightly smoothed using Central Moving Average smoothing technique.
- Note on the FNB Valuers’ Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple “good (100)”, “average (50)”, and “weak (0)”. From all of these ratings, we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers’ Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
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