Homeowners can expect favourable house price inflation growth this year, according to Lightstone Property’s 2022 HPI forecast.
House price inflation (HPI) ended 2021 just above Lightstone’s mid-growth HPI scenario of 4% and the expectation is that HPI in 2022 will finish somewhere between 3.4% and 5.1% which suggests that the residential property market has weathered the worst of the pandemic storm.
The forecast versus the reality in 2021
HPI in 2021 was 4.35%, slightly above Lightstone’s mid-growth HPI scenario where an end-of-year HPI of 4% was predicted, with the expectation that HPI would mirror the consumer price index (CPI). This scenario was predicted on economic growth recovering to pre-Covid-19 levels but without the serious economic reforms needed to set South Africa up for strong longer-term growth.
Lightstone’s scenario also considered the historically low interest rate environment, and a growing response from a market segment to the work-from-home trend, a feature of the 2021 high growth HPI scenario.
House price inflation scenarios in 2022
Lightstone’s scenarios for this year are based on assumptions around key factors that influence house prices which include:
Gross Domestic Product (GDP) growth which is the strongest driver of sustainable house price growth.
Lightstone has tested three likely scenarios with the best-case placing GDP growth at 3%, while a more realistic estimate would be 2% with a low estimate at a pedestrian 1.5%.
These estimates are in line with other economists, many of whom forecast GDP growth from around 1.9% to just above 2% in 2022 with inflation around 4.6%. However, projections are that GDP growth will slip in 2023 to around 1.8%, although economic reforms could lead to revising these predictions upwards.
Consumer Price Index (CPI) inflation
Apart from GDP growth, Lightstone expects SARB to effectively manage CPI in the 3% to 6% target band, setting the repo rate as one of the tools to achieve this.
StatsSA defines CPI as a measure of “monthly changes in prices for a range of consumer products. Changes in the CPI records the rate of inflation. The CPI can also be used as a cost-of-living index”.
Looking at both GDP growth and CPI inflation, Lightstone’s high growth GDP scenario assumes a CPI inflation figure at the top end of the target band of 5.5%.
Lightstone analysts believe that it is more likely that CPI will end the year closer to 5%. Further predictions show that CPI inflation will end 2022 at 4.5% for the low growth GDP estimate.
Depending on which scenario plays out, Lightstone expects SARB to increase interest rates by a cumulative 50 to 150 basis points during the year as it seeks to manage CPI inflation while also improving South Africa’s appeal as a foreign investment destination.
Projected house price inflation growth scenarios
Low growth scenario
Lightstone would expect this HPI growth scenario to continue throughout the first two quarters of 2022 before bottoming out and recovering slightly at the end of the year at 3.4% – a comparative increase on the low-end projected 12 months ago.
Mid-growth scenario
It is likely though that slightly stronger economic growth and less aggressive interest rate hikes in the first two quarters of the year should lead to a softer landing with house price growth, stabilising in Q2 and picking up in Q3 and Q4. The outcome of this is Lightstone’s mid-growth HPI scenario, where they expect house price inflation to close the year at 4.2%, closer to where it started in 2022.
High growth scenario:
In a more optimistic high economic growth scenario, Lightstone expects house price inflation to rapidly recover in Q2 with strong momentum going into Q3 and Q4, resulting in an end-of-year house price inflation of 5.1%. This would, however, require positive economic reforms resulting in a 3% GDP growth for the year.
Projected winners and losers by market segment
Freehold properties – especially in the luxury market segment – could end the year with HPI at over 5% if high economic growth and lower interest rate increases prevail typically because a large portion of these higher valued properties have bigger mortgages meaning they are more responsive to positive changes in the macro-economic environment.
The mid-value market segment entered 2022 on a discouraging downward HPI trend and is set for a difficult recovery, especially under a low growth economic scenario, where HPI for this segment might drop to just 1.5%.
“As Covid-19 appears to become more manageable and its status transitions from pandemic to endemic, the conditions for economic renewal becomes easier. In particular, the tourism industry will begin the task of reclaiming lost international markets and commerce and the industry will accelerate recovery to pre-pandemic levels. All eyes will, however, be on policies and programmes initiated by the South African government because economic reforms will lay the foundation for better than anticipated growth – which in turn will benefit the residential market and help attain the high growth HPI scenario”, says Head of Digital at Lightstone, Hayley Ivins-Downes.
