The mini-boom in house prices from the lows reached during last April’s hard lockdown seems to be over.
The latest FNB Property Barometer shows year-on-year house price appreciation slowed in May, for the first time in 11 months.
Two other indicators tracked by the bank, being volumes of mortgage applications as well as its demand strength indicator, “declined in the past two months, perhaps suggesting that the interest rate-induced demand may have peaked”.
FNB’s house price index increased 4.1% year on year in May from 4.6% in April (Lightstone’s separate house price index printed the same result in April).
FNB says that while indicators show demand is “now moderating”, these “remain above pre-pandemic levels, in part reflecting the positive effect of lower interest rates on market activity”. These are around 50 to 100 basis points higher than the figures in 2018 and 2019, before the Covid-19 pandemic.
However, inflation at that point was noticeably higher than now, meaning that in real terms house prices were in decline. With inflation at current levels, house prices are effectively flat (when factoring in inflation).
FNB says “mortgage credit has been rising steadily since the second half of 2020” as lenders appear willing to lend for asset-backed purchases (“unsecured credit components are trending lower”).
South African Reserve Bank data for April shows domestic private credit contracted by 1.76% year on-year, with a 1.52% contraction in March. This followed low single-digit expansion in January and February.
FNB says loan-to-price (LTP, effectively loan-to-value) ratios have continued to rise but highlights that this predates the Covid-19 pandemic and various lockdowns.
This, it says, “is largely attributed to intense competition among lenders in a thin volume market”.
Buyers in the upper segments (R1.5 million and above) have benefitted most and the loan-to-price segment in this part of the market remains higher than it was in the first quarter of last year. These segments make up the top 40% of the overall market by purchase price.
FNB says “these numbers suggest that liquidity remained intact throughout the pandemic, and upper-income segments benefitted the most”.
It adds: “For Q1 average LTP appears to have retreated slightly, but it remains broadly in line with the 2020 average. At this stage it is too early to conclude that lenders are beginning to slow down; we will need more data points to make this determination.”
The lender cautions that while all these “factors are broadly supportive of market activity, they are more cyclical in nature”.
It highlights that “structural factors, such as employment growth, remain elusive”.
“The latest labour market data shows that there are still 1.4 million fewer people employed compared to the same period last year, and that employment gains made in the second half of 2020 were somewhat reversed in the first quarter.
“Company liquidations remain elevated and wage growth is low.”
FNB says “these have been offset by low interest rates as well as the pandemic-induced changes in housing preferences (people choosing home ownership over renting).
Read: SA has ‘extremely bright economic prospects’ – economists (Jun 14)
Positively, it notes” a potential upside on non-wage income, especially dividend income, which could provide impetus for upper-income households”.
“We are also somewhat encouraged by employers’ perceptions about [the] employment outlook, which have become materially less bearish.
“However, this has not filtered through to official employment numbers yet.”
Listen to Nompu Siziba’s interview with RE/MAX Southern Africa CEO Adrian Goslett (or read the transcript here):