The recent FNB Residential Property Barometer reports that house price growth has slowed for the first time in almost a year following eleven months of successive gains with FNB HPI annual house price appreciation slowing in May 2021 to 4.1% year-on-year (y/y), from 4.6% in April 2021.
The slowing pace of house price growth coincides with the slowing of FNB’s propriety demand indicators – both of which declined in the past two months and this may suggest that the interest rate-induced demand might have peaked following a strong rebound in 2020’s second half and into 2021.
However, these remain above pre-pandemic levels, still reflecting the positive effect of lower interest rates on market activity.
Meanwhile, lenders appear willing to fund residential property acquisitions, or more generally, asset acquisitions (asset-backed credit components are trending higher, while unsecured credit components are trending lower).
Data from the SARB shows that mortgage credit has been rising steadily since 2020’s second half, reaching 5.6% y/y in April, from 4.4% y/y in March. Preliminary data also shows that loan-to-price ratios (proxy for loan-to-value) have continued to rise, suggesting willingness by lenders to finance a bigger proportion of the purchase price. However, the surge in LTPs predates the pandemic (it began in 2017) and is largely attributed to intense competition among lenders in a thin volume market.
Segmenting by purchase price, it shows that experiences have been uneven across the spectrum, with buyers in the upper segments benefiting the most.
For the bottom 20% (average purchase price of R420 000), LTPs initially declined, presumably because the initial impact of the pandemic affected mostly blue-collar workers, and gradually recovered in 2020’s second half as economic activity ramped up. By 2021’s first quarter, LTPs had broadly moved sideways for all segments, except the two uppermost segments that make up the top 40% by purchase price.
Overall, these numbers suggest that liquidity remained intact throughout the pandemic, and upper-income segments benefited the most.
For 2021’s first quarter, 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 and FNB will need more data points to make this determination.
While the above factors are broadly supportive of market activity, they are more cyclical in nature.
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 2020’s second half were somewhat reversed in 2021’s first quarter.
Company liquidations remain elevated and wage growth is low. So far, however, these have been offset by low interest rates as well as the pandemic-induced changes in housing preferences, i.e., home ownership over renting.
Positively, FNB has noted a potential upside on non-wage income, especially dividend income, which could provide impetus for upper-income households and somewhat encouraged by employers’ perceptions about employment outlook, which have become materially less bearish. However, this has not filtered through to official employment numbers yet.
