Higher lending rates and weaker economic outlooks will inevitably temper once spirited housing markets, with signs of cooling already in evidence.. (Oupa Nkos)
Tightening financial conditions are choking consumers all over the world.
Higher lending rates and weaker economic outlooks will inevitably temper once spirited housing markets, with signs of cooling already in evidence.
South Africa’s residential property market is not immune to these headwinds. However, housing markets can look drastically different from country to country — and though, like others, South Africa’s got a boost from historically low interest rates, longer-term trends have set it up for a less painful slump.
In two weeks’ time, the South African Reserve Bank will decide on how large an interest rate hike it will unleash on borrowers.
As has been the case during the last couple of monetary policy committee meetings, the decision will not be between hiking or not hiking the rate, which the Reserve Bank slashed to 3.5% in 2020 to cushion consumers against the pandemic’s onslaught.
Instead, the committee will be weighing an aggressive increase against an even more aggressive one. Last week, Reserve Bank governor Lesetja Kganyago delivered a public lecture which seemed to support the view that there will be another 75 basis point, or higher, hike come 24 November.
The Reserve Bank has hiked rates by 275 basis points since November last year. The repo rate, which affects the cost of borrowing, averaged 6.7% between 2017 and early 2020.
The rate currently stands at 6.25% but a number of analysts are expecting it to settle much higher at between 7.25% and 7.75% in 2023.
In South Africa, growth in residential property prices has slowed since the second quarter of 2021. The Reserve Bank’s hiking cycle saw liftoff in November of that year.
The year-on-year rate of increase in the two house price indices (Lightstone and FNB) moderated to 3.2% and 3.4%, respectively, in August 2022 — well below inflation. Consequently, the Reserve Bank noted, real house prices have declined on a year-on-year basis since December 2021 and by as much as 4.1% in July 2022.
“Despite improved domestic economic activity over the past year, the lacklustre growth in house prices reflected slowing property demand due to rising interest rates, high unemployment, low consumer confidence and the effect of higher consumer price inflation on households’ purchasing power,” the bank noted in its September quarterly bulletin.
(John McCann/M&G)The document further noted that subdued growth in house prices was also evident in the increase in the average time that residential properties remained on the market, from 7.6 weeks in the first quarter of 2022 to 9.4 weeks in the second quarter. Properties in KwaZulu-Natal and Gauteng spend the longest time on the market.
Andrew Golding, chief executive of the Pam Golding Property group, said the country’s housing market has been resilient considering significant local and global economic headwinds.
“Having said that, there is no doubt that the market is not as buoyant as it was when interest rates were at historic lows. The reality of our market is that it is very sensitive to interest rates,” he said.
“So, the fact that the interest rate trend is up — the fact that we have had a number of increases already and that the market has factored in more to come — has resulted in a natural slowing down of the market.”
However, Golding said, the housing market’s cooling probably also has to do with other factors, such as low economic growth and high unemployment.
According to Golding, South Africa’s housing market was relatively stagnant prior to the pandemic, distinguishing it from markets elsewhere.
However South Africa’s position is markedly different from other countries, such as the United States, where consumers had enjoyed relatively low interest rates for quite some time prior to the pandemic.
In the US, 30-year mortgage rates are at their highest level since 2002, which puts significant pressure on the housing market.
US home prices have steadily increased since about 2012. However, last week the US Federal Reserve reportedly warned of upcoming steep declines in home values. This is after Fed chair Jerome Powell said the housing market would have to endure a “difficult correction”.
Mortgage rates in the United Kingdom rose sharply after financial markets reacted harshly to erstwhile prime minister Liz Truss’s mini-budget in September.
Average UK mortgage rates have surged near a 14-year high and house prices have fallen markedly as a result. Economic uncertainty and the cost-of-living crisis has caused some analysts to forecast steep declines in house prices, marking the end of almost a decade of rising property values.
Compared to advanced economies, South Africa also entered the pandemic with a weak labour market, FNB economist Siphamandla Mkhwanazi explained. “So, what that meant for us is that house prices did not grow as much as they did in those countries. That means, with the rise in interest rates now, the correction isn’t as pronounced as we are seeing in those markets.”
Mkhwanazi pointed out that mortgage volumes are still “remarkably resilient”, with property transfer duties recording growth of 21.7% year-on-year in September. “That tells you there is an active market. It is slowing, the extent of the slowdown hasn’t been as pronounced.”
Underpinning continued activity, Mkhwanazi noted, are some fundamental changes to the country’s property market.
(John McCann/M&G)For one, housing has become more affordable as a result of the stagnation in prices after the global financial crisis. During this period, disposable incomes have managed to catch up with house prices.
Aspiring homeowners also enjoy greater access to credit that they would have had a decade ago, with mortgage extension growing at an average rate of about 7% year-on-year in recent years — significantly above the post-global financial crisis rate of about 3.8%.
Moreover, household formation is growing far quicker than the population, which means there is more demand for housing, Mkhwanazi added.
“So, from the numbers we are seeing,” he concluded, “we are not going to see as bad a correction as elsewhere. It will continue slowing but we don’t see a price crash happening.”
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