If you’re looking to make money on residential bricks and mortar over the next few years, don’t hold your breath.
Latest forecasts from banks and other industry players point to a bleak outlook for the housing market, with price growth expected to slow to its lowest level in 15 years.
The extent to which the property sector’s fortunes have changed is underscored by FNB’s recent downward adjustment to its growth forecasts. Three months ago, the bank was expecting house prices to rise 3.4% in 2023, only marginally down from last year’s 3.5% (see graph). However, the bank has now cut its 2023 forecast to 2.1% as more consumers buckle under financial strain.
This will be the lowest growth recorded by FNB’s house price index since 2008/2009, when prices dipped briefly on the back of the global financial crisis. The only other time the index recorded growth below 3% in the past 20 years was in 2020 (2.5%), when Covid temporarily shut down the housing market.
Of course, price growth could vary markedly depending on location and price bracket. In the fourth quarter, for instance, FNB recorded a high of 7.3% in the R5.5m-R7.5m segment, while prices fell by 2% in the R7.5m-plus market.
The bad news is that weaker demand is likely to extend into 2024 — FNB has pencilled in growth of only 1.7% for the year — before lifting slightly, to 2.7% in 2025.
Given FNB’s consumer-price inflation forecast of 5.8% and 5.2% for 2023 and 2024, it means house prices will fall in real (after-inflation) terms for at least the next two years.
As FNB senior economist Siphamandla Mkhwanazi points out, “the steep interest rate hiking cycle and elevated inflation have eroded affordability, making it difficult for buyers to save enough for a down payment [on a home]”.
FNB’s mortgage data shows affordability issues are already forcing homeowners to hold onto property for longer. The average time South Africans stay in one home lengthened to a record 7.8 years in 2022, nearly double the three to four years that were typically recorded in 2000-2011.
Data analytics firm Lightstone paints an equally dim picture. Its chief analytics officer, Paul-Roux de Kock, suggests three possible scenarios for the future of the housing market. In the most bearish, price growth slows to a mere 0.9% by end-2023 and dips into negative territory in 2024. This is the most likely outcome if GDP growth stalls at 0% this year and core inflation drops to 3%.
The second scenario is based on slightly positive economic growth — though still less than 1% — which could slow the house price decline. De Kock reckons that could see house price growth of a more moderate 2.3% by year-end.
In the third scenario, the economy recovers, GDP growth clocks in at just over 1% and inflation remains at elevated levels of 5.5%. Under these conditions, house prices could bounce back and end 2023 with growth of 3.7%, and “strong upward momentum” going into 2024.
Data from mortgage originator BetterBond shows there’s already been a slowdown in appetite for home loans. The firm recorded a 15.38% year-on-year drop in the number of applications processed in the 12 months to end-February.
That’s after a 5.25% y/y increase in the previous 12-month period.
Still, BetterBond CEO Carl Coetzee expects mortgage application volumes to stabilise over the coming months and hold steady into 2024 as the country approaches the end of the rate-hiking cycle.
The South African housing market is unlikely to see the marked downward correction that’s taking place elsewhere. But with the rising risk of recession, it is under pressure
— What it means:
According to BetterBond’s figures, mortgage demand differs markedly from province to province.
The smallest drop in applications over the past year was recorded in Joburg’s northern and western suburbs. There was zero growth in volumes in the region in the prior year.
In the Western Cape, BetterBond recorded a 24% decline in home loan applications for the year to February, after 14% growth in the prior year. This suggests the post-Covid semigration wave of upcountry buyers moving to the province may be slowing.
Estate agents confirm that housing sales have cooled in recent months, albeit to various degrees in different provinces, cities and price categories.
Harcourts CEO Richard Gray says the group’s sales turnover in the six months to end-February is down 10% y/y.
He notes first-time buyers in the sub-R1.5m price category have been hardest hit by rising interest rates. This is the same segment that was initially responsible for the uptick in sales in 2020/2021, when rates fell to near 50-year lows.
The drop is easy to understand, given how financially stretched consumers have become. After all, the 375 basis-point rate hikes since November 2021 have added nearly R2,400 to monthly bond repayments on every R1m owed to the bank.
Gray says rising fuel, food and other living costs also need to be factored in. “Homeowners have additional pressures in the form of rising municipal rates and electricity costs,” he adds.
However, he says the slowdown has to be seen in context, as Harcourts’ volumes over the past six months are still 56% ahead of pre-Covid levels (September 2019-February 2020).
Pam Golding Property Group CEO Andrew Golding is of a similar view. Though there’s been a drop in overall sales, demand in the five largest metros is holding up well, he says.
Golding refers to recent Lightstone data, which shows that 46,497 freehold and sectional title sales were recorded in Cape Town, Tshwane, Joburg, eThekwini and Gqeberha in 2022. That’s about 4% fewer than the 48,438 properties that changed hands in the five cities in 2021, but still 12% ahead of 2019.
However, there has been a slight shift in market share among the metros. Over the past 10 years Gqeberha and Tshwane have gained the most market share — up 1.7% and 1.2% respectively — in terms of the total number of houses sold.
Cape Town’s market share has remained largely unchanged over the decade, while Joburg’s has shrunk 2.4%.
Golding says Tshwane now accounts for just over a third of all sales across the five cities at 33.6%, followed by Cape Town (24%), Joburg (20.2%), eThekwini (12.2%) and Gqeberha (10%.)
Foreign buyers may become reluctant to invest locally if ‘we don’t see a sense of urgency to set the economy back on a growth-led path’
— Samuel Seeff
Despite the slowdown in activity, industry players believe the local housing market will avoid “bubble” conditions.
That’s mainly because South African house prices remained in low single-digit territory over the past three years. In contrast, house prices in many offshore markets surged by double-digit rates from 2020-2022, and now face huge downward corrections.
Still, not even Cape Town’s housing market, which has outperformed most other cities in the past three years, will be immune to a recession. This seems increasingly likely, given the ongoing energy crisis and the possibility that the economy has again contracted in the first quarter.
Post-pandemic sales in the Mother City’s high-end suburbs have been buoyed by the return of offshore buyers and a rising tide of wealthy Gauteng semigrants, lured by the remote working trend, better municipal service delivery and less intensive load-shedding.
But Seeff Property Group chair Samuel Seeff points out that confidence is already dipping among well-heeled buyers. Unlike rate-sensitive lower and middle-end buyers, he says wealthy investors are concerned about the struggling economy, weaker rand, ongoing energy crisis and political noise.
Seeff says even foreign buyers, who accounted for about 30% of all sales on the Atlantic seaboard over the past year, may become reluctant to invest locally if “we don’t see a sense of urgency to set the economy back on a growth-led path”.
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