Property
By Siphamandla Mkhwanazi.
Key themes:
House price growth levelled out in 4Q23, signs of a faint recovery on the horizon
The FNB House Price Index growth averaged 0.8% y/y in December, marginally higher than the 0.7% in November (revised from 0.5%), and a low of 0.5% in October (Figure 1). This suggests that annual house price growth averaged 1.5% in 2023, in line with our expectations. The marginal uptick in the last three months of 2023 signals that price growth may have reached its trough. That said, we expect the weak house price growth trajectory to continue for a little while, amid heightened uncertainty. In addition to the potential impact of the election cycle and a possibility of further fiscal slippage on currency stability, the heightened geopolitical tensions, biosecurity risks as well as adverse weather patterns complicate the deceleration trend in inflation and could prolong the lift in inflation expectations away from target. This could cause interest rates to remain high for longer than we currently anticipate and extend prevailing market weakness.
Nevertheless, our base case view suggests that the gradual decline in inflation and borrowing costs from 2H24, combined with some employment gains, should modestly stimulate demand in the interest-rate sensitive segments over the medium term, which would support a moderate uptrend in house prices.
Estate Agents Survey results for 4Q23: Market activity ended the year on a better footing
Market activity ticked up marginally to a rating of 5.3 in 4Q23, from 5.1 (out of 10) in 3Q23 (Figure 2). The agents' activity rating trend suggests that home buying activity levelled out between 2Q23 and 3Q23. This trend is reflected in the house price growth trajectory depicted above. Nevertheless, the activity rating remains 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 improvement in activity was relatively broad-based across regions covered by the survey, apart from the Eastern Cape which saw its activity slip further to 5.0, from 5.4 in the previous quarter. The Western Cape once again recorded the highest activity at 6.0, marginally better than last quarter's 5.9 rating. Notably, the pace of increase in activity is decelerating - alongside the semi-gration trend (see "reasons for selling" below). Gauteng recovered to 5.0, from 4.3, while KwaZulu- Natal climbed higher to 5.7, from 5.2 in the previous quarter.
Nevertheless, forward-looking indicators suggest that the increase in activity might be short-lived. Estate agent's short-term (three months ahead) expectations somewhat backpedalled, with only 31% of respondents expecting activity to increase in 1Q24, down from 50% in 3Q23. The relative despondency mainly emanates from agents focusing on the affordable market. While part of this is due to seasonality, concerns around affordability, the cost of living, and lack of job security were cited as main drivers for the relative pessimism. Indeed, 53% of surveyed agents stated that income levels are "far behind" house prices, compared to 43% previously, and just 30% in 4Q22 at the start of interest rate tightening cycle (Figure 3). In addition, the normalising semi-gration trend may also have influenced agents' outlook on the Western Cape market, weighing on overall market expectations.
The average time that properties are on the market for sale was largely unchanged, at 11 weeks and four days (81 days), marginally shorter than 82 days in 3Q23. According to agents, 63% of listed properties take three months or longer to sell, slightly lower than the 67% estimated in 3Q23. Taken as a whole, these market developments somewhat lifted agents' mood in 4Q23. The proportion of estate agents who are satisfied with current market conditions increased marginally from 46% in 3Q23 to 49% in 4Q23, still reflective of broadly weak market enthusiasm. Most notably, market satisfaction declined in the Eastern and Western Cape, as well as in affluent markets (>R3.6m property values).
Reasons for selling: financial pressure-induced sales remained elevated at 25% of total volumes in 4Q23 (Figure 4), still higher than the historical average of 18% since 4Q07. As expected, these are disproportionately higher in the affordable market segment, where a third of volume sales are thought to be financial pressure related. This is consistent with the sharp increase in living and debt servicing costs, which should have a more pronounced impact on lower-income households. Sales attributed to relocation within SA (semi-gration) have continued to normalise, estimated at 11% of volume sales, from 12% previously and a peak of 14% in 3Q22. Nevertheless, these are still above the long-term average of 9% since the inception of the survey question in 4Q07. Incidents of upgrading have also slowed considerably since the beginning of the tightening cycle, from 15% in 4Q21 to 10% in 4Q23. Emigration-related sales were steady at 8%, significantly lower than the peak of 18% observed in 2019 but in line with the long-term average since 4Q07.
