Is SA House Price Inflation Showing Signs of Slowing?

The South African property market continues to show some resilience despite the global Covid-19 pandemic.  According to Lightstone’s Residential Property Index for May 2021, “Residential property price growth continues to accelerate with all provincial indices in an upward trajectory.”   The current national inflation increased by 0.3% from the previous month to 4.9% as at end May.  In contrast, the national house price inflation was 2.42% at the end of May 2020.  Gauteng province has seen an increase of 3.2% in comparison to May 2020, with a current inflation status of 4.4%.  In terms of property inflation, “the lower value segments continue to outperform their higher value counterparts”; 8.7% in comparison to 4.3% respectively.  Interestingly, demand for property in the lower value band has dampened in the last year, as a result of low prime lending rates and favourable lending environment positively impacting affordability and enabling many homebuyers to comfortably enter the middle- and upper-value market.

However, FNB’s House Price Index for June 2021 showed annual house price appreciation slowed for the first time in 11 consecutive months, from 4.6% in April to 4.1% in May.  Other indicators support the fact that the stagnating price growth may signal demand is tempering - having peaked in the second half of 2020 and first quarter of 2021.  Data shows that both buyers’ demand for housing and the number of mortgage applications declined in recent months.  This coincides with Rode’s forecast in April that the residential market was showing early signs that prices were “trending sideways”.  In January and February of this year, house prices outpaced consumer inflation - an encouraging sign as they had been declining in real terms for several years.  However, the impact of rising unemployment and the loss of household income following stringent lockdown restrictions appears to be curbing demand growth, despite the favourable homebuying environment resulting from record low interest rates.  

Industry experts believe that the residential property market remains one of the country’s more resilient sectors, bucking economic sector trends by rebounding earlier than expected and improving steadily into 2021 when many economists predicted prices would plummet.  Although the surge in industry activity in the second half of 2020 could be attributed to pent-up demand as a response to lockdown restrictions and record-low interest rates, there are still indications that home-buying activity is robust, even if overall demand is “gradually dissipating”.

FNB maintains that market strength indices remain above pre-pandemic levels, indicating that the lower interest rates continue to bolster market sentiment.  Housing loans continue to rise, with April marking 5.6% growth in mortgage lending, up from 4.4% in March.  In addition, the loan-to-price (LTP) ratios have risen steadily since 2017, driven by competition between the banks to secure loan business, and indicate financial institutions’ sustained appetite to finance a larger portion of the purchase price.  This bodes well for first-time buyers looking to enter the market and existing buyers upgrading to the middle- to upper-value segments (where data reveals most of the credit is funding).

The South African Reserve Bank, the country’s central bank, held the repo rate at 3.5% in May – its lowest level since its introduction in 1998.  The Monetary Policy Committee (MPC) unanimously agreed that the decision to leave the repo rate unchanged was necessary to support the ailing economy and financially distressed South Africans.  In his statement, SARB governor Lesetja Kganyago affirmed that “[m]onetary policy continues to be accommodative, keeping financial conditions supportive of credit demand as the economy recovers from the pandemic and associated lockdowns.”  Kganyago stressed that additional steps were necessary to enhance the policy’s effectiveness and highlighted the growing inflation risks.  While the MPC recognises the need to provide monetary policy accommodation for as long as possible, economists expect the central bank to begin raising local interest rates towards the end of 2021/beginning of 2022 to balance supporting the fragile economy and curbing rising consumer inflation.  Statistics SA reported that annual consumer inflation eased to 4.9% in June after accelerating sharply to 5.2% in May – the highest reading since November 2018.  Although still within the midpoint of the central bank’s 3%-6% target range, the readings recorded for the last three months have averaged above the bank’s expected headline consumer inflation of 4.2% for 2021.