Property
By Siphamandla Mkhwanazi and Koketso Mano
Forecast changes
We have revised our inflation outlook downward, primarily due to a quicker strengthening in the rand exchange rate as domestic political uncertainty has eased and global sentiment improves. This adjustment has led us to anticipate an earlier interest rate cutting cycle. We now forecast two 25bps repo rate cuts this year and another 25bps cut early next year. However, a more aggressive slowing in inflation or the real Federal Funds Rate poses downside risk to this projection. Furthermore, we have increased our GDP growth forecast, reflecting the easing of energy constraints, lower inflation, anticipated interest rate cuts, improved market sentiment, and refined assumptions regarding the impact of the two-pot pension system (Table 1).
Impact on housing market
These adjustments suggest a slightly more optimistic outlook for buying activity and house price growth in the coming years. Improved economic activity, a more benign inflation environment, and looser monetary policy could improve affordability for potential homebuyers, stimulate demand and support house price growth. While we maintain our predictions for 2024 and 2025, we have revised our forecasts upward for 2026 from 3.3% to 3.6%.
Current market conditions
The FNB House Price Index (HPI) growth averaged 0.6% y/y in August, unchanged from the previous month (Figure 1). Year-to-date, the FNB HPI has averaged 0.8%, down from 1.8% in 2023 and 4.7% in 2022 in the same period. This highlights how lower disposable incomes and a higher cost of credit have adversely impacted demand, and subsequently, house prices. Notably, the slowing trend appears to have stabilised since May and is expected to show a clearer upward trend once interest rates begin to decline.
In the mortgage market, growth in mortgage extensions slowed to 2.5% in July from 2.7% in June, reflecting subdued demand and house prices, as well as stringent lending criteria. The Deeds data suggests that while loan-to-price (LTP) ratios have stabilised, mortgage volumes are still declining, albeit at a slower pace, due to reduced demand as deteriorating affordability results in lower approval rates. Year-to-date (1H24), LTP has averaged 94.5%, slightly below the 94.7% average in the same period last year. Volumes, however, have declined by 12.0% in the same period, having troughed at around -30% in 2H23 (Figure 2).
The rental market exhibits mixed trends. Rental inflation fell slightly to 3.2% in the second quarter of 2024 from 3.3% previously. This reflects weak demand and landlords' diminished pricing power in a market with abundant options. However, Rode's residential survey data indicates that vacancy rates for flats have decreased in 2Q24, to 6.7% from 7.9% in the previous quarter. Although this represents an improvement, it remains higher than pre-pandemic levels, where vacancy rates averaged 5.4%, suggesting a relative surplus of rental properties (Figure 3). While high interest rates may favour renting over buying, this data suggests that this has not been sufficient to absorb the excess supply, potentially due to a sluggish labour market. In addition, our 2Q24 Estate Agent Survey results suggest that most households that are selling due to financial pressure would rather downscale than go back into the rental market.
On the supply side, the volume of new-build housing stock is declining, mirroring the subdued demand. Year-to-date (January to June), the supply of new stock decreased by 19.2% compared to the same period last year (Figure 4). This downturn is particularly pronounced in the <80 square metre category, which primarily represents affordable housing. Furthermore, the pipeline supply is also shrinking, as evidenced by a 19.6% year-to-date decline in the volume of approved building plans, following a 30.1% decline in the same period last year. These developments reflect the weak demand environment and indicate that building activity will likely remain low until a significant increase in overall housing demand and selling prices is observed.
