Key themes:
House price growth continues on a downward trajectory
The FNB House Price Index's annual growth decreased in May, averaging 1.9% year- on-year, down from 2.1% in April (revised from 2.7%) (Figure 1). Elevated living costs as well as higher borrowing and debt-servicing costs continue to erode affordability, particularly among lower-income groups. Nevertheless, price growth remains well supported in the lower end, while early data shows significant declines in property values above R5.5m (Figure 2). Notably, the Supply index, derived from our property valuers database, has trended higher in recent months, now suggesting that listings are higher on a year-on-year basis, in contrast to the Demand index (Figure 3). This is consistent with our estate agents survey results, which show that buying activity is dwindling and the average time-on-market is stretching across the spectrum. Agents now estimate that 56% of properties listed for sale take three months or longer to sell, an increase from 33% in 1Q22.
From an economic growth perspective, we have revised our expectations lower to reflect the delayed and ongoing impact of higher inflation and tighter-than-expected monetary policy. We now expect the economy to shrink marginally by 0.1% (2.0ppts lower than the average growth for 2022), reflecting weaker domestic demand, an assumed persistence of higher stages of load-shedding, as well as a drag from net trade due to the constrained rail network. Nevertheless, growth should gather pace towards the end of the year as inflation slows sufficiently. We expect GDP growth to average 1.1% in 2024, before rising to 1.8% in 2025 as energy constraints ease (see our outlook here).
Estate agents survey results for 2Q23: Weaker consumer fundamentals slipping through
Market activity slipped to a rating of 5.1 (out of 10) in 2Q23, down from 5.7 in 1Q23. At this level, agent activity rating languishes just below the long-term average of 5.9 (since the inception of the survey in 2004), and considerably (28.2%) lower than the most recent peak of 7.1 recorded in 4Q20. By region, the Western Cape recorded higher activity at 6.2, still lower than last quarter's 6.9 rating. Gauteng saw the biggest decline in activity, from 5.3 to 4.5, the lowest rating across all the regions. In KwaZulu-Natal, activity slipped to 5.2 from 5.7, while the Eastern Cape was relatively unchanged at 5.7 in 2Q23. By price, the R250k-R500k bracket was the best performer, with a rating of 6.9, down from 8.0 previously (Figure 4). Higher activity in lower priced segments is boosted by the downscaling trend amid heightened financial pressure, with homeowners across income groups searching for cheaper alternatives.
Correspondingly, agent expectations for the housing market decreased further in 2Q23, with only 17% of respondents expecting an increase in activity in the next three months, compared to 25% in 1Q23. Factors cited for this decline include a sharp increase in interest rates, a weaker economy, souring buyer sentiment, and disruptions to buying activity caused by load-shedding.
The results suggest that the average time that properties are on the market for sale has lengthened to 12 weeks and one day (85 days), compared to 75 days in 1Q23. While still shorter than the long-term average of approximately 91 days (since 3Q04), this is the longest time on market since 2Q20, and is attributed to slowing activity and stretched affordability (Figure 5). Overall, agents estimate that approximately 56% of properties on the market for sale now take three months or longer to sell, an increase from 33% in 1Q22. A combination of these factors weighed on estate agent sentiment in 2Q23. As measured by the percentage of estate agents who are satisfied with current market conditions, sentiment declined to 38% from 45% in the previous quarter (Figure 6).
Reasons for selling:
Financial pressure-induced sales increased to 24% in 2Q23, from 17% of sales volumes in 1Q23, higher than the historical average of 18% since 4Q07. As expected, these are disproportionately higher in the affordable market segment, with an estimated 32% of sales attributed to financial pressure. This reflects the impact of the sharp increase in debt servicing costs, which should have a more pronounced impact on lower-income households. Sales attributed to relocation withing SA appear to be plateauing, from 14% in 3Q22 to 12% in 2Q23, following an increase from 8% in 1Q20. Emigration-related sales were steady at 9%, significantly lower than the peak of 18% observed in 2019. However, these remain elevated in higher-priced segments, particualy the R2.6m-R3.6m bracket (Figure 7). By age, the 35-44 group make 67% of those believed to be selling due to emigration.
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.
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.
