News Residential

Home loan extension trend highlights demand for higher priced market

Property market strength indicators show that demand is moderating, but still above 2019 levels, according to FNB’s Residential Property Barometer for November 2021.

Despite slow volume growth, the value of home loan extensions continues to trend higher, supported by demand for bigger home loans which reflects a shift towards higher price brackets (or bigger properties).

FNB’s estimated loan-to-price ratio (proxy for loan-to-value, at origination) trended lower during 2021’s Q3, implying that buyers forked out slightly bigger upfront deposits relative to the 2020 average but still smaller when compared to 2019.

The slow recovery in the labour market, combined with higher interest rates, suggests a less supportive medium-term environment for home buying. However, if sustained, the ongoing shifts in housing needs – which has lent support to homeownership – could mitigate this impact.

Annual house price growth came in lower during October

The slowing trend in house price growth continued in October 2021, with the FNB House Price Index decelerating to 3% year-on-year, from 3.2% in September (revised up from 3%). The slowing pace of price growth is consistent with the waning interest rate induced demand and a lagged recovery in labour markets.

FNB’s market strength indicators show a widening demand gap; the demand index has started signaling a marginal decline in the year-on-year growth, while the supply index continues to recover.

Loan-to-price ratios trends lower

In FNB’s earlier reports, the loan-to-price ratio climbed throughout the pandemic to the highest levels recorded since 2008. This increase was more pronounced in higher purchase prices (top 40% of the market). Recent data suggests a reversal of that trend, with average loan-to-price ratios falling to 92.1% during Q3 2021, from a peak of 93.1% in Q4 2020.

FNB believes this reversal is partly because market volumes are migrating away from younger buyers (<35 years old) towards middle-aged (35 – 55 years old) and, to a lesser extent, older age groups (+55-year old’s). These buyers typically have more equity and access to savings to fund upfront deposits.

In addition, the tightening in the higher purchase price suggests that lenders are reducing their exposure in the higher-priced segments where most of the activity is concentrated. Nevertheless, loan-to-price ratios remain above the post-global financial crisis average of 89.9%.