Standard Bank special report: August HPI slows to 7.3% y/y as demand weakens

Moderating growth in house prices, as purchasing activity slows; low and middle income earners pull back most

– SBR’s HPI slowed to 7.3% y/y in August from 7.6% y/y in July (fig 1). Sub-indices show that freehold property prices rose 8.9% y/y from a slightly upwardly revised 7.8% y/y in July (originally 7.7% y/y), while sectional title property prices slipped to 9.5% y/y from 9.8% y/y in July (fig 1).

– Moderating growth in property prices is driven in part by risk aversion in the household credit space due to the economic background and job insecurity. Household credit had slowed sharply to 1.4% y/y in July, from 2.1% y/y in June. If we adjust the credit data for the structural break caused by African Bank, household credit slowed to 2.7%.

– However, Standard Bank notes that despite the overall decline in risk appetite, growth in mortgages (which account for 60% of total household credit) was up marginally to 4.2% y/y in July from 4.1% y/y in June. Stripping out mortgages, they show that household credit would have declined by 2.5% y/y in July (fig 2).

– From a supply perspective, construction of residential units saw H1:16 growth of 6.25% y/y (fig 3), compared to the same time period in 2015. In H1:16, the number of freestanding houses completed declined by 15.5% y/y, compared to growth of 11.8% y/y in the construction of flats and townhouses. Standard Bank thinks that further residential oversupply could continue to put downward pressure on property prices in the short- to medium term.

– From a demand perspective, SBR’s Volume Index (based on mortgages applied for and granted) shows that purchasing activity contracted for a second consecutive month, by 16.1% y/y in August (fig 4). Softer demand and resilient supply dynamics are negative from a house price perspective.

Standard Bank segments their mortgage applications by income group (figs 5, 6, 7 & 8):

– Low income: R123,418 pm

They show that purchasing activity (the change in mortgage applications YTD versus the same period last year) has softened across all income groups. Activity has been the slowest for low and middle income earners. Whereas in 2015 mortgage demand by low income earners had grown by 180% over the first three quarters of the year, in 2016 demand is up only 65%. For mid-income earners growth year-to-date is 40%, versus 200% over the same period in 2015.

Looking ahead: Standard Bank still sees the softening labour market as a drag on demand for and supply of mortgages. Further, the resilient supply of residential units in a weak demand environment is negative for property price growth.

Read more here: Standard Bank August HPI 2016