FNB Property Barometer - Home-buying Market Showing Resilience

According to the FNB Property Barometer for February 2021, the South African home-buying market is showing resilience.

FNB Economist Siphamanda Mkhwanazi highlighted the following key themes in the report:

Key themes

• Recent data shows better-than-expected house price growth; further demonstrating the decoupling of economic fundamentals and housing market outcomes.
• Interest rate-induced demand remains strong, but momentum is slowing.
• Incidents of downscaling due to financial pressure continue swelling, although lower compared to GFC.
• Rental market pressures persist; vacancy rates are climbing and rental escalations slowing. Anecdotal evidence shows that some of this stock is being released into the market for sale.
• Labour market weaknesses remain a major concern. Data shows, in line with FNB expectations, that job losses are now migrating to more white-collar workers.

Annual house price growth accelerates in February

The FNB HPI annual house price appreciation for February rose to 4.2% y/y, up from 3.9% in January. On a month-on-month basis, however, price growth continues to slow, likely reflecting the tapering of interest rate-induced demand. This is consistent with Estate Agents Survey data, which showed still strong but slowing buyer demand, mainly in the middle-priced segments of the market. Forward-looking indicators suggested slowing demand in 1Q21, with only 37% of surveyed agents expecting volumes to increase from 4Q20 levels. FNB continue to see bigger, mainly freestanding, properties gaining in popularity, with buyers responding to the demands of remote working.

Outlook

Available data shows that lower-end prices remain relatively strong but are decelerating, in line with the initial impact on labour markets. FNB expects this "correction" to continue, as employment takes time to recover. However, the inherent stock shortages will likely keep property values afloat. Indeed, estate agents operating in affordable segments still see demand outstripping supply.

Much of the reflation in 2H20 was driven by middle segments, buoyed by low interest rates as well as demand for bigger spaces to facilitate remote work. Part of this was also driven by tenants switching from renting to owning. It is unlikely that there is much of this demand left in the tank - Stats SA data shows that 66 000 professionals lost jobs in 4Q20, which does not augur well for mortgage demand. Furthermore, as pressure in the rental market intensifies, we expect more stock to be released into the market for sale. A combination of these factors is expected have a dampening effect on activity and, eventually, price growth in the coming months.

Prices in the upper end have, over a prolonged period, adjusted lower, due to receding demand and rising incidents of selling due to emigration. Available data shows properties in the top 1% price distribution declined by an average -5.5% in 2020. For 2021 FNB expect less negative price growth, as owners delay their selling decisions due to unfavourable selling conditions and emigration trends lower (estate agents data shows these sales to have peaked in 2019).

Overall, property prices have been unusually slow to adjust to the evidently weak consumer fundamentals. In part, this is due to the nature of the crisis, which incentivised property ownership, as well as a concerted response from lenders that smoothed the impact on housing markets (see information box below).

Information Box 1: Residential property - Explaining the resistance

• Nature of the crisis: Incentive is to own property to facilitate remote work. Evidence shows a relatively stronger demand for bigger properties.
• Ultra-low interest rates: The lower rates facilitated a strong demand impulse, by making mortgage payments more affordable (for those whose incomes remained intact during the pandemic). It also prevented major distressed sales during this period.
• Unprecedented support from lending institutions: Willingness of lenders to, among other interventions, restructure loans and offer payment holidays prevented a major supply glut at the height of the pandemic.

• Disproportionate labour market impact: First wave of job losses affected mainly blue-collar workers, who typically would not afford a mortgage; while white-collar workers remained broadly unaffected. As a result, the initial impact of the pandemic benefited the home-buying market, at the expense of the rental market. This was seen in the form of skyrocketing vacancy rates, while demand for mortgages climbed, as tenants who could afford to switched from renting to owning. However, labour market pressure is now migrating to white-collar workers: Stats SA data shows that 66 000 professionals lost their jobs in 4Q20, while other occupations recorded net job gains in the same period.