Why SA house prices won’t crash

Higher borrowing costs, surging fuel and food prices and no sign of the Russia-Ukraine war abating are eroding homebuyer exuberance across the world.   

UBS Global Wealth Management warned last month that “significant” corrections in house prices can be expected in a number of capitals as the post-pandemic boom unwinds. 

A number of cities in the US, Canada, Europe and Asia have recorded double-digit increases since mid-2021, which UBS says puts them in overvalued territory. These include London, Paris, Madrid, Sydney, New York and San Francisco. Vancouver, Toronto, Amsterdam, Frankfurt, Munich, Zurich, Tel Aviv, Tokyo and Hong Kong face more serious bubble risk, according to UBS.

South Africa’s housing market is also cooling, following a two-year upturn. Latest figures from data analytics group Lightstone shows the number of residential transfers registered in the deeds office in the third quarter dropped to 60,700, down from the second quarter’s multiyear high of 77,880.

That represents a 22% decline quarter on quarter. However, third-quarter transaction volumes are still 1% ahead year-on-year.     

RE/MAX Southern Africa, one of the country’s largest residential real estate groups, reports a corresponding slowdown in housing activity. Regional director Adrian Goslett says the number of properties sold by the group year to date is down about 4% year-on-year.

However, sales volumes started to taper off only from September, which he believes aligns with that month’s 75 basis-point interest rate hike, the second in short succession. The latter brought the cumulative rate hikes since last November to 275 basis points, taking South Africa’s prime lending rate from 7% to 9.75%.

But despite lower sales volumes, South African house prices are still climbing — albeit at a slightly slower pace. FNB’s house-price index notched up growth of 3.3% in the third quarter, down from a 5.1% peak recorded in April 2021. 

Samuel Seeff, chair of Seeff Property Group, ascribes SA’s relatively healthy housing market outlook to fierce competition among mortgage lenders. He refers to latest figures from ooba that show banks continue to grant home loans at attractive rate concessions at an average prime less 0.30% in the third quarter. That compares with an average prime plus 2% typically offered by banks pre-Covid. 

The good news for homeowners is that South Africa’s housing market is not expected to come crashing down soon. That may seem counter-intuitive given the stuttering economy, sky-high unemployment, load-shedding and more rate hikes to come.

Still, FNB economist Siphamandla Mkhwanazi expects only a modest slowdown in housing activity over the coming months. That’s despite rates probably rising by a further 100 basis points over the next six months.

Mkhwanazi concedes that steeper-than-expected rate increases mean housing affordability will become more stretched. However, housing markets in many global capitals are now overheated while South African house prices haven’t risen to the same extent. So South Africa is still relatively more affordable, he says. 

Mkhwanazi refers to “structural” affordability, which measures the gap between real disposable income and real house prices. He says housing became less affordable during the last boom in the run-up to the global financial crisis. Post-2008, however, the gap narrowed as incomes started to catch up with stagnant house-price growth. 

FNB’s estimates show that real disposable income finally caught up with real house prices around 2019, which coincided with a sudden rise in SA’s home ownership rate. Over the past year, real disposable income growth has overtaken house-price growth for the first time in 20 years.

Mkhwanazi cites a number of other factors likely to provide support for South Africa’s housing market. These include stronger household balance sheets post-Covid, especially among higher-income groups who are seeing improved investment income from stocks and bonds

He says credit is also more readily available these days and lenders are demanding smaller upfront cash deposits. For example, loan-to-price ratios typically sat at no more than 90% pre-pandemic, which translates into a cash deposit requirement of at least 10% of the purchase price.

In contrast, Mkhwanazi estimates loan-to-price ratios stood at an average 95.1% in the second quarter, which he says is the highest level since the 2007/2008 global financial crisis.

Strong growth in SA households is further propping up housing demand. Mkhwanazi says household formation has been outpacing population growth since 2003 but the gap widened after 2016.  Demographic effects tend to be slow in nature, causing lagging behavioural changes, which he says could explain why increased overall demand for housing is only now coming to the fore.

Though FNB expects the slowdown in buying activity to continue, this is unlikely to translate into house prices actually falling, says Mkhwanazi. In fact, his expectations remain rather bullish with house-price growth forecasts of an average 3.5% and 3.4% for 2022 and 2023 respectively, only slightly down from last year’s 4.2%.