Economics weekly
By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Demand recovery, supply constraints, and the impact of rest rate cuts in the housing market
The local housing market is entering a cyclical upturn. In September, the FNB House Price Index (HPI) recorded its fastest annual growth in over three years, last seen in May 2022 when interest rates were significantly lower. This marks the fourth consecutive month of real house price appreciation, a rare occurrence outside of the artificially low-interest rate environment during the pandemic. Below, we assess how the recent interest rate cutting cycle has reshaped demand-supply dynamics.
Demand: A cautious rebound
The recent interest rate cuts have begun to stimulate demand, particularly among first-time buyers, the most rate-sensitive segment. FNB's internal home loan application data shows that first-time buyers made up 44.4% of applications in August 2025, up from 43.5% since the first rate cut in 2H24 and the 43.2% post-pandemic average (2023 onward). While this marks a positive shift, participation remains below the long-term average of 45.6% seen since 2019. This suggests that while monetary easing has helped alleviate affordability pressures and encouraged re-entry into the market, structural challenges, such as income constraints and limited supply in entry-level segments, continue to temper the recovery.
Supply: A sharper decline
In contrast to the modest demand recovery, FNB's Market Strength Indicators, derived from property valuers' database, suggest that housing supply has declined more significantly. This means that developers and sellers are holding back, likely due to elevated construction costs, economic uncertainty, and unfavourable selling conditions. This has created a supply-driven price surge, with constrained inventory - rather than robust demand - being the primary driver of recent price growth.
Bottom line
Interest rate cuts have begun to revive demand, but not enough to trigger a full-scale recovery. Instead, constrained supply is driving price growth and reshaping market dynamics. These conditions carry strategic implications for both lenders and policy makers. For a more balanced and sustainable recovery, monetary easing must be paired with bold, targeted interventions - particularly in the affordable housing segment - to unlock demand and ease supply bottlenecks. For lenders, this creates room to test funding models that expand access to homeownership while still managing risk responsibly.
Week in review
The leading business cycle indicator lifted by 0.9% m/m to 113.7 points in July, which reflects 1.2% annual growth versus 0.3% previously. The rise was supported by gains in seven of the ten available components, with the largest contributions coming from higher commodity prices as well as an acceleration in the trend growth of new vehicles sold. The largest mitigators were slower trend growth in M1 money supply and a narrower interest rate spread.
The FNB/BER Consumer Confidence Index (CCI) declined from -10 to -13 in 3Q25, indicating further weakening in consumer sentiment. This drop was driven primarily by a sharp deterioration in confidence among middle-income households (R5 000-R20 000/month), whose index fell from -7 to -16. While high-income households (above R20 000/month) remained steady at -11, and low-income households (below R5 000/month) showed a notable rebound from -15 to -9. Despite being an improvement from the exceptionally low -20 recorded in 1Q25, the current reading remains well below the historical average of -1 since 1994, suggesting a slowdown in real household consumption growth. The decline was mainly due to worsening perceptions of household finances and the economic outlook, although the time-to-buy-durable-goods sub-index slightly improved, supported by a 25-basis-point interest rate cut and a stronger rand.
Producer inflation accelerated to 2.1% y/y in August, from 1.5% in July. On a monthly basis, prices rose 0.3%, easing from 0.7% in the prior month. Excluding petroleum-related products, producer inflation quickened to 2.9% y/y from 2.6%. Food prices continued to drive headline pressure, rising to 4.3% y/y from 3.9%. Within this category, notable increases were seen in meat and meat products (18.5% y/y from 18.2%), as well as fruits and vegetables (4.9% y/y from 4.0%), and oils and fats (1.7% from 0.7%). Metals and equipment prices also picked up, posting a 1.1% rise after a subdued 0.1% increase in July. Vehicle inflation strengthened to 3.5% from 3.2%, while deflation in parts appears to have ended, with prices increasing by 0.5% in July and 0.7% in August. Although still negative, the pace of decline in paper and printed products and in coke and petroleum-related products has moderated.
Week ahead
On Tuesday, data on Private Sector Credit Extension (PSCE) for August will be published. PSCE growth accelerated to 5.8% y/y in July, up from 5.0% y/y in June. Household credit growth remained subdued at 3.0%, slightly lower than the 3.1% recorded previously. While car finance and credit cards were resilient, mortgage growth and other unsecured credit slowed and reflect persistently high default rates. In contrast, corporate credit continued to outperform, rising to 8.3% from 6.6% in the prior month, supported by general loans and vehicle asset finance.
Also on Tuesday, the Quarterly Employment Statistics (QES) for 2Q25 will be released. The 1Q25 QES continued to show weak formal employment outcomes at the start of 2025. Although a seasonal dip in employment is typical following the festive season, the persistently low aggregate employment levels underscore an economy struggling to absorb its available workforce. Formal employment was down by 74 000 q/q (or 0.7%) and 95 000 y/y (0.9%) led by trade and community services. Earnings also declined by 4.6% q/q but are still 2.7% higher than a year ago and roughly in line with inflation. Compared to the start of 2020, over 270 000 jobs have been added – translating to 2.6% growth. Earnings, on the other hand, have grown by 32.5%. Therefore, while South Africa has had a persistent jobs crisis, incomes have fared more favourably.
Also on Tuesday, the FNB/BER Civil Confidence Index for 3Q25 will be published. The Index fell for the third consecutive quarter in 2Q25, dropping to 41 from 45 previously. This decline in sentiment occurred despite signs of improved construction activity and profitability, with employment also showing gains.
Last on Tuesday, the trade balance for August will be published. The trade balance recorded a R20.3 billion surplus in July, slightly lower than the R20.9 billion surplus in June. The July outcome reflected an 8.5% m/m increase in exports to R184.3 billion, while imports rose at a faster pace of 10.2% m/m to R164.0 billion, narrowing the surplus modestly. Year-to-date, the trade surplus stands at R98.9 billion, below the R113.7 billion recorded over the same period last year. This reflects exports rising 1.3% y/y year-to-date, while imports have edged down 0.1%.
On Wednesday, the manufacturing PMI for September will be released. The PMI fell by 1.4 points to 49.5 in August, slipping back into contractionary territory and partially reversing July's brief expansion. Sector activity remained subdued, with both domestic and export demand under pressure. Supplier deliveries declined, likely due to weaker orders rather than logistical improvements. Input cost pressures eased slightly, supported by a stronger rand and stable oil prices. Encouragingly, expectations for near-term business conditions remained upbeat at 56.8. Notably, the average PMI for 3Q (with September pending) stands at 50.2, up from 45.4 in 2Q25.
Also on Wednesday, new vehicle sales data for September will be released. Vehicle sales volumes increased by 18.7% y/y in August, reaching 51 880 units. The increase was mainly driven by continued growth in new passenger car sales, which expanded by 22.5%, marking a 14th consecutive monthly gain. New commercial vehicle sales also advanced by 10.3% - light commercial vehicles rose by 15.1%, heavy commercial vehicles surged by 56.9%, bus sales increased by 22.4%, medium commercial vehicles declined by 3.9%, and extra-heavy commercial vehicle sales fell by 28.0%. Year-to-date (January to August), total sales were 48 790 units higher than during the same period last year, supported by low and stable inflation, lower interest rates, and strong demand for entry-level and affordable brands.
On Thursday, data on electricity generated and available for distribution for August will be released. Electricity production declined by 2.3% y/y in July, following a 1.3% decline in June. However, on a seasonally adjusted basis, generation rose slightly by 0.1% m/m, partially recovering from a 1.4% decline in June. Looking at the broader trend, electricity generation increased by 1.1% in the three months ending July 2025 compared to the previous three-month period, suggesting that output is stabilising.
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