Mortgage Barometer – Residential Demand Conditions

Key leading economic indicators are pointing in the direction of a near term economic growth strengthening. This would likely strengthen employment, and in turn Household Sector Disposable Income growth. In addition, interest rates have not risen further since March 2016, while real house prices (house prices adjusted for CPI inflation) have been in decline of late. This has translated into improving housing affordability on a national average basis. Improved housing affordability combined with improving economic growth should be a catalyst for some strengthening in the demand for housing.

One of FNB’s key residential indicators suggests that housing demand may be strengthening. However, 2 others haven’t yet pointed to strengthening, so it is far from a “clear cut” strengthening picture yet, but strengthening, we believe, nevertheless.

The FNB Residential Activity Rating begins to strengthen following a prior declining trend

Although the FNB Residential Activity Indicator is not strictly an indicator of housing demand only, but rather of all activity in an estate agent’s world (see notes on page 5-6), FNB believes that its direction does reflect housing demand conditions most of the time.

FNB believes, therefore, that it can be used as a useful demand-side indicator. And the fact that it has shown a rise in the past 2 quarters suggests to us that there has been some increase in housing demand levels of late, after a prior slowing trend.

From a 7-year low point of 5.59 (on a scale of 1 to 10) reached in the 3rd quarter of 2016, the Residential Activity Rating has seen a noticeable 2-quarter rise to a 6.31 level in the 1st quarter 2017 survey.

Admittedly, the rise came as South Africa was going into the seasonally stronger summer. However, to eliminate seasonal factors FNB uses a statistical seasonal adjustment to compile their Seasonally-Adjusted Residential Activity Rating. This index, too, has risen noticeably from 5.69 in the 3rd quarter of 2016 to 6.01 in the 1st quarter of 2017.

It would thus appear that the 2-quarter strengthening in the Activity rating is more than just the usual summer seasonal strength.

On a year-on-year percentage change basis, the negative growth rate has not quite disappeared. But it has been diminishing in recent quarters, from -9% year-on-year decline in the 3rd quarter of 2016 to a negligible -1.25% decline as at the 1st quarter of 2017.

This trend is very similar to a rising quarter-on-quarter movement in both the SARB and OECD Leading Business Cycle Indicators, and to a diminishing in year-on-year decline in the OECD version and a return to recent slightly positive year-on-year growth in the SARB Leading Business Cycle Indicator.

Typically, the Residential Activity Rating moves in a similar direction to the Leading Business Cycle Indicators, and FNB believes it to be something of a leading business cycle indicator itself, its recent upward movement reflecting some strengthening in the economy starting up.

This strengthening in Residential Activity should ultimately lead to a return to positive growth in new Household Sector Mortgage Lending. However, the lag time from when Residential Activity Rating levels bottom out and start to grow until when new mortgage loans granted begin to do the same can be 4 quarters or longer, leading FNB to believe that a return to positive year-on-year growth in the value of new mortgage loans granted may only happen towards the 2nd half of 2017,

The estimated number of show house viewers does not yet point to rising residential demand … 

A further FNB Estate Agent Survey question, however, does not yet point towards rising residential demand.

This question asks survey respondents for an estimate of how many “serious viewers” per show house they experience or perceive. In the 1st quarter of 2017, this estimate had declined from 11 in the prior quarter to 9.92 serious viewers per show house.

Normally, FNB would expect a rise in this estimate if residential demand increases. However, it can at times be that an improvement in asking price realism, speeding up buyer decisions and lowering time of homes on the market, could imply less viewers per show house for a short period of time.

Either way, as yet FNB cannot see clear evidence of rising residential demand in this indicator’s latest reading.

… Nor does the FNB Valuers’ Demand Strength Index yet show rising demand

Nor is there yet visible evidence of a demand increase in the FNB Valuers’ Residential Demand Strength Index, whose month-on-month rate of change remains in negative territory.

This, however, does not surprise FNB, as this indicator is normally more of a coinciding indicator than a leading indicator. It thus typically turns the corner a little slower than does the Residential Activity Rating.


Not all 3 of FNB’s residential demand-related indicators have yet turned upwards. However, arguably the most leading indicator of the 3, namely the Residential Activity Rating, has turned noticeably higher in the past 2 quarters. This Activity rating, admittedly, does not only refer to demand-side activity in the housing market, but to supply-side activity too. However, FNB does believe that its recent rise is driven to a significant degree by a rise in housing demand, which should filter through into growth in residential transactions as well as new mortgage lending with a lag. FNB believes this to be the case because, viewing key leading economic indicators, FNB sees signs of near term economic strengthening. The alleviation of drought conditions should boost Agriculture output in 2017, and some strengthening in mining commodity prices makes something of a Mining and even Manufacturing Sector strengthening likely.

Stronger economic growth, along with no further interest rate hikes since March a year ago, drive our the belief that residential activity is rising largely due to an increase in residential demand.

Strengthening economic growth should lead to some strengthening Household Sector income growth, while the combination of no further interest rate hikes along with house prices declining in real terms means that housing affordability is improving gradually. These factors should be expected to cause some rise in housing demand.

Read more here: Property Barometer – Demand Conditions – March 2017