Key themes:

  • Market volumes may have peaked, but they are still running above pre-pandemic levels. Bar the sentiment shock from the ongoing geopolitical tensions and devastating floods in some parts of the country, internal market strength indicators suggest relatively resilient market activity in the near term.
  • We expect interest rates to increase by a cumulative 150bps this year, on the back of rising inflationary pressures, exacerbated by the ongoing geopolitical tensions.
  • The stagnant labour market, combined with rising interest rates and higher living costs, suggests a less supportive medium-term environment for home buying activity.
  • However, early signals in the employment intentions indices suggest that certain industries in the private sector are now planning to add headcount after a prolonged period of reducing headcount relative to payroll. This, combined with the ongoing shifts in housing needs and banks’ appetite for quality lending could mitigate the impact of the less supportive environment.

Annual house price growth moved lower in April

The FNB House Price Index growth moved slightly lower in April, averaging 3.9%y/y from 4.1% in March (revised up from 3.7%) (Figure 1). Price growth appears to have stabilised in the last few months, with overall support predominantly coming from pricier segments. Market strength indicators, derived from our Property Valuers database, show receding supply of properties on the market for sale, while demand growth remains in the positive territory, albeit slowing (Figure 2).

Despite the rising cost of funding, market activity and credit availability remain intact. Mortgage credit extension averaged 6.8% y/y in the last three months for which data is available, surpassing average house price growth of 4.0% in the same period. The market-wide loan to price ratio, derived from Deeds data, has also increased to 94.9% in 1Q22, the highest level in approximately 14 years (since 2Q08) (Figure 3). Market-wide mortgage volumes are still above pre-pandemic levels, even with the incomplete 1Q22 data point (Figure 4). Indications from internal mortgage application volumes are for market volumes to remain supported in the near term. The impact of the ongoing Russia-Ukraine war and the devastating floods in KwaZulu-Natal on sentiment, and the economic recovery pose a downside risk to this view.

In line with expectations, a gradual recovery in the rental market is underway. Vacancy rates have descended from the peak of 13.1% in 4Q20 to 9.9% in 1Q22. On the flip side, rental escalations have gradually recovered from a trough of 0.6% y/y in 1Q21 to 1.9% in 1Q22. We expect the rental market’s gradual recovery to continue as interest rates rise and employment growth gathers some traction.

Summary of Estate Agents Survey results 1Q22

Market activity improved marginally from a rating of 6.5 (out of 10) in 4Q21 to 6.8 in 1Q22. This is on the back of a recovery in KwaZulu-Natal activity following the July 2021 riots and the seemingly strong activity in the Eastern Cape region. By price, this quarter’s activity was pushed higher by affordable segments, particularly the R500k-R750k sub-segment. Looking ahead, expectations of near-term activity (in the next three months) pulled back, with only a third of respondents (31%) expecting activity to increase from current levels, presumably factoring in higher interest rate expectations. Interestingly, however, agents in the affordable market still expect reasonable activity, with 55% expecting a further increase in activity in the next three months, versus 23% in the traditional market.

Average time properties spent on the market for sale remained unchanged at 8 weeks. This varied markedly across regions, with Western Cape (6 weeks, 3 days) and KwaZulu-Natal (6 weeks and 4 days) faring better. Gauteng recorded the longest time on market, at 8 weeks and 6 days. By price segment, the R1.3m-R2.6m bracket recorded the shortest time of 6 weeks and 4 days. At 8 weeks in 1Q22, time on market remains well below the post global financial crisis average (since 2009) of 14 weeks and 1 day.

Estate agents’ sentiment, as measured by the proportion of agents who are satisfied with prevailing market conditions, was unchanged at 76%. The KwaZulu-Natal region saw a further improvement in sentiment, from 62% to 75%, following a riot-induced 51% in 3Q21. At this level, sentiment in the province has fully recovered to the pre-riots’ reading of 72%. Notably, sentiment among estate agents that operate in affluent areas pulled back to 70%, from 80% previously, likely influenced by the ongoing war in Ukraine.

The reason for selling matrix remained broadly unchanged from the previous quarter and shows that sales due to financial pressure are still elevated at an estimated 18% of the market, while emigration-related sales remain stable at around 9%. This ratio, however, increases to 15% in the R2.6m-R3.6m and >R3.6m segments.


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. The 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.