Key themes:
House price growth unchanged in April as high borrowing costs take hold
The FNB House Price Index's annual growth averaged 2.7% year-on-year (y/y) in April, unchanged from the previous month (March figures revised up from 2.1%) (Figure 1). Our Estate Agents survey for 1Q23 indicated lengthening time-on-market, suggesting a mild deterioration in demand-supply balance. The latest reading from our Supply Index, derived from our database of property valuers, shows upward pressure on the supply of properties for sale, likely as homeowners look for cheaper alternatives due to stretched affordability.
Growth in mortgage extension is moderating steadily, with the latest data showing growth of 6.6% y/y in March, down from 6.9% in February. However, this still compares favourably to the post-Global Financial Crisis (GFC) average growth of 3.9% (Figure 2).
Market activity continues to decline, in line with higher borrowing costs and weaking consumer fundamentals. The year-to-date internal mortgage applications, a crude yardstick for market demand, are down by 13.1% compared to the same period last year, and 16.9% lower compared to 2021. Disaggregating by income level, market participation has declined the most among the "interest-rate sensitive" groups, i.e., low to middle-income segments, while appetite in the higher end, by comparison, has only declined moderately. Applications from those earning < R450k pa and those earning between R450k and R750k were lower by approximately 23% and 13%, respectively. In contrast, demand from those earning > R750k pa was only 1% lower in the same period (Figure 3).
In our view, this reflects the disproportionate impact of higher borrowing costs across income groups. Interest rates tend to have an outsized and prompt impact on mortgage demand by lower to middle-income earners, but smaller and delayed impact in upper-income segments. However, other factors, particularly depressed sentiment, presents additional downside risks to activity in upper segments. Overall, this data suggests that the deleveraging trend on asset-backed credit is likely driven by middle to lower-income earners, and indicative of the extent of the deterioration in affordability across the income spectrum.
FNB SA Economic Forecast
| Economic Indicator | 2020 | 2021 | 2022 | 2023f | 2024f |
|---|---|---|---|---|---|
| Real GDP %y/y | -6.3 | 4.9 | 2.0 | 0.1 | 1.4 |
| Household consumption expenditure % y/y | -5.9 | -5.6 | 2.6 | 0.8 | 1.4 |
| Gross fixed capital formation % y/y | -14.6 | 0.2 | 4.7 | 3.6 | 3.2 |
| CPI (average) %y/y | 3.3 | 4.5 | 6.9 | 5.9 | 5.4 |
| CPI (year end) % y/y | 3.1 | 5.9 | 7. 2 | 5.0 | 5.4 |
| Repo rate (year end) %p.a. | 3.50 | 3.75 | 7.00 | 7.75 | 7.50 |
| Prime (year end) %p.a. | 7.00 | 7.25 | 10.50 | 11.25 | 11.00 |
| USDZAR (average) | 16.60 | 14.80 | 16.40 | 17.70 | 17.70 |
ADDENDUM - NOTES:
Note on The FNB House Price Index:
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well-known Case-Shiller methodology which is used to compile the Standard & Poor's Case-Shiller Home Price Indices in the United States.
This "repeat sales approach" is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month's sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB's own valuations database, thus based on the residential properties financed by FNB.
We apply certain "filters" and cut-offs to eliminate "outliers" in the data. They main ones are as follows:
Note on the FNB Valuers' Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple "good (100)", "average (50)", and "weak (0)". From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers' Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
