By Koketso Mano & Siphamandla Mkhwanazi
Overview
We entered 2026 with optimism. The South African (SA) reform-driven outlook, which should include lower living and borrowing costs, upheld conducive financial conditions. An upswing in the credit cycle would be fanned by improved sentiment as well as stronger balance sheets, built during the earlier phase of the interest rate cutting cycle. In line with this, we anticipated an enduring recovery in the housing market, characterised by a rotation from supply-led price growth toward a period of broadened and resilient demand. While the war in the Middle East is the most pressing risk to our outlook, we remain constructive on the SA narrative.
HPI moderates in February
The housing market recovery following the most recent interest rate hiking cycle has been gradual - initially catapulted by wealthier households and now diffused across price segments and areas. While wealthier households would have been encouraged by reduced policy uncertainty and improved sentiment, higher disposable incomes bode well for the participation of many other households. There is a high likelihood that activity will lead price appreciation in 2026. We therefore expect softer HPI growth initially, before an acceleration in 2027 and 2028. In February, the HPI recorded growth of 0.2% m/m and 5.4% y/y, which was slightly softer than 0.5% m/m and 5.5% y/y in January. Even as growth decelerated, it remained robust, beating inflation of 3.5% in January and the expected 3.2% in February.
Our constructive outlook has been confronted by significant risks. The most recent war in the Middle East could result in longer-term damage to oil-related infrastructure and logistics, which would keep prices elevated for a protracted period. As a net-importer of petroleum products, this poses upside risk to SA's inflation outlook and could delay interest rate cuts, meaning it would take longer for monetary policy to shift to a more neutral stance. This would somewhat dampen the expected boost from financial conditions and economic growth could be slower. Unfortunately, these developments often weigh on the willingness to make long-term investments. We continue to monitor developments around the war but maintain our view that SA's focus on rebuilding state institutions, while creating a business-friendly environment that allows for competitive behaviour, is the best long-term strategy to reduce the economy's vulnerability to external shocks. As we have seen since this war started, the rand has remained relatively resilient - upheld by less perceived risk associated with investing in SA.
Estate agents remain upbeat at the start of the year
Our 1Q26 Estate Agent Survey shows broad satisfaction with market conditions, with a 77% satisfaction rate across the market. Satisfaction is also diffused, recording 78% in the affordable market and 77% for higher-priced properties, and at 86% in Gauteng (GP); 76% in the Eastern Cape (EC); 68% in the Western Cape (WC); and 66% in KwaZulu-Natal (KZN). Properties are spending about three-to-six months on the market, but the time is less, at one-to-two months, in many of the major provinces.
While agent sentiment is almost evenly split between viewing current market activity as being stable or positive, most agents believe activity will rise in the near term. Many of these agents operate in KZN (66%); EC (62%); GP (55%); and in the price segments up to R2.6 million. The salient factors driving these expectations include interest rate reductions, positive consumer sentiment, and conducive seasonality. That said, stock issues prevail and the structural weakness in the construction sector, as reflected in the long-term trend in residential building plans passed and the 1Q26 FNB/BER Building Confidence Index, should continue to uphold price strength.
Adding to stock limitations is a slower emigration trend. In addition, there are signs that the earlier trend of semi-migration to coastal areas has likely peaked, as affordability is a growing inhabitant to living on the coast - particularly the Western Cape. Affordability remains top-of-mind even when deciding to sell (21% of decisions to sell), and most of these sellers are looking to buy cheaper property, making areas that offer value for money more attractive. This could explain renewed interest in Gauteng. Households are also downscaling with life stage (24%) while a decent proportion of sellers are looking to upgrade (15%) - highlighting that the factors supporting the market are diverse and this creates the foundation for a balanced recovery.
Conclusion
The housing market outlook is positive as supply and demand point to enduring market strength. While structurally constrained supply initially stoked price appreciation, demand should play a larger role as financial conditions ease and sentiment towards SA improves.
Ultimately, continued political fracturing across the globe will sustain economic policy uncertainty. These developments are often coupled with heightened risk aversion which does not bode well for financial conditions. The war in Middle East could dampen the willingness to invest in property or compress financial conditions enough to deter buyers who rely on continued improvements in disposable income. This will weigh on how quickly the recovery in the residential property market gathers momentum.
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.
