House price growth has slowed down, again

The FNB HPI (House Price Index) annual house price appreciation decelerated further to 2.6% y/y for August, from 3.4% in July - revised up from 3.1%.

“Our proprietary market strength indicators show that demand is now moderating, after a strong rebound in the second half of 2020 and into 2021,” says FNB Senior Economist, Siphamandla Mkhwanazi.

“However, these are still above the levels experienced in 2019. This reflects the positive effect of lower interest rates on market activity and changes in housing needs resulting from the Covid-19 pandemic.”

These include:

• More people are working from home than ever before.
• The number of children now home-schooling is increasing.
• Higher mortgage amounts

Mkhwanazi says that mortgage extension continues to grow at a faster pace while loan-to-price ratios are trending lower.

The Property Barometer shows that mortgage extension in July rose by 7.2% year on year - the quickest in 12 years, since May 2009. This seems at odds with the demand and market activity indicators outlined above. Meanwhile, loan-to-value ratios – the proportion of a loan that lenders are willing to finance - have dropped from their recent highs in the fourth quarter of 2020.

“Our investigations show that much of this credit is funding property purchases in the middle- to upper-priced segments. This means that mortgage loan amounts have increased, which reflects a shift towards purchasing in higher price brackets,” says Mkhwanazi.

“The weaker-than-expected labour market data for the second quarter of this year, combined with the potential adverse effects of the recent unrest on employment prospects for the third quarter, suggest that longer-term demand fundamentals will most probably take longer to recover to pre-pandemic levels.

“However, we note a potential upside on non-wage income - particularly dividend income - which could boost income growth for affluent households.”

Expectations

Mkhwanazi says FNB has consistently argued that property prices have been unusually slow to adjust to the weak consumer fundamentals.

The bank explained that support has come from unprecedented factors, such as:

• Historically low interest rates.
• The nature of the crisis - which incentivised property ownership.
• The concerted response from lenders that smoothed the impact of severe job losses on housing markets – for example, through payment holidays and loan restructuring.
• The relative abundance of credit despite these job losses.

However, recent data shows that market volumes may have peaked, and market strength is weakening which means the demand gap is widening. Nevertheless, says Mkhwanazi, these remain above 2019 levels.

"The recent deceleration in house price growth is in line with our expectations – reflecting waning demand induced by low interest rates and swelling labour market pressures.

“Demand driven by consumer shifts from renting to owning may also have peaked. This is reflected in the stabilising flat vacancy rates and bottoming rental inflation.

“These shifts played a vital role in supporting home-buying activity in the first half of 2020 and into 2021, mostly in middle-priced segments. With this demand losing momentum, it is not surprising that the deceleration in house prices is more pronounced in middle-priced segments.

“Nevertheless, we still expect annual house price growth to improve in 2021. This will reflect the comparatively stronger demand and a brighter growth outlook for GDP,” says Mkhwanazi.

Courtesy of Private Property | FNB Senior Economist, Siphamandla Mkhwanazi