By Koketso Mano & Siphamandla Mkhwanazi
Overview
While we entered 2026 with optimism, persistent geopolitical fracturing continues to dominate global headlines. The latest war in the Middle East initially raised the oil price risk premium and has increasingly extended to supply disruptions. While the two-week ceasefire has created a temporary reprieve, prices remain elevated and highlight logistical frictions as well as the risk of further escalation. At this stage, it is unlikely that the conflict will be as short-lived as hoped and this dims the macroeconomic outlook. However, it has not yet derailed it.
We still think that ongoing structural reforms in South Africa (SA) will gradually reduce living and operating costs while improving broader financial conditions. In addition, these reforms are meant to boost productivity while building policy buffers, which will be pivotal in helping SA navigate a challenging external backdrop by attracting investments that are less sensitive to global shocks; creating an environment where corporate and household balance sheets are less vulnerable; and using policy buffers to respond to any market failures and support the most exposed parts of the economy. This longer-term outlook should uphold SA's cyclical recovery even as the war weakens its pace.
HPI moderates in March
In March, the house price index (HPI) recorded growth of 0.2% m/m and 5.7% y/y, which was slightly softer than 5.8% y/y (revised up from 5.4%) in February. Therefore, even as growth decelerated, it remained robust, beating inflation of 3.0% in February and the expected 3.1% in March.
The recovery in the residential property market is expected to continue in 2026, although it may be softer than projected prior to the war. Current property market trends suggest that there are a both structural and cyclical factors that are supportive of activity. One factor is affordability and while the average earnings potential (employment and income) in the country has not been structurally supportive, real house price compression over the 2010s as well as mortgage innovations (including longer terms; group applications; youth-focused interest-free schemes) has assisted with narrowing the affordability gap. Another factor is financial conditions. Improved investor sentiment, slower inflation, and the most recent interest rate cutting cycle have generated more conducive financial conditions in the current cycle and we expect improving fundamentals to sustain these conditions going forward.
Relatedly, better structural dynamics and sentiment should uphold the participation of wealthier households and foreigners in the domestic market, who are better positioned to look-through cyclical headwinds. The more pressing concern is that affordability tailwinds could falter, weighing on the participation of households with less financial buffers. A reconsideration of our forecasts has resulted in an upgrade of projected headline inflation (but remaining below 4% on average this year), the removal of one 25-basis point cut from our interest rate expectations (with one cut still expected in 2H26), while dampened sentiment leads to slower spending and investment (and growth is forecast at 1.3% versus 1.5% previously). Even with these adjustments, a protracted war has a higher likelihood of producing more constraining outcomes and the impact on the activity of more vulnerable households will be pronounced.
This is important because we anticipated that households that spent 2025 repairing their balance sheets would be able to re-enter the market and reinforce the recovery that has been spearheaded by wealthier households. This uplift in demand would thereafter lead to further house price appreciation. We therefore could see softer volumes and HPI growth this year, but the recovery could have enough momentum that we still see acceleration in 2027 and 2028. As reflected in our market strength index, upbeat demand conditions continue to drive the market's strength. Furthermore, outcomes over recent months have surprised us to the upside, creating a solid starting point for the outlook and mitigating the anticipated hiccups following the war.
Conclusion
We remain constructive on the housing market outlook as supply and demand dynamics continue to support the recovery and point to enduring market strength. Structural affordability improvements and more supportive financial conditions have been critical to improving participation in the market, but the ongoing war presents a considerable challenge to our macroeconomic outlook. Higher inflation, less monetary policy easing, and weaker growth should weigh on the prospects of households with limited financial buffers and discretionary spending. This could weigh on the speed of mortgage demand and house price growth.
That said, we are still encouraged by the promise of the reform agenda. A more efficient operating environment should lift SA's growth potential while reducing its vulnerability to external shocks. These longer-term dynamics could uphold investments, allowing the recovery to be sustained by households with less vulnerable balance sheets. Therefore, while we are worried about the speed of the unfolding cyclical recovery, we think long-term prospects are broadly intact.
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.
