News Residential

Geopolitical tensions and the downside risks to SA’s residential market

Siphamandla Mkhwanazi, Senior Economist at FNB.

Rising geopolitical tensions could ‘sour’ buying activity in the residential space, says FNB. In the face of rising inflationary pressure, exacerbated by the Russian-Ukraine conflict, analysts anticipate interest rates to increase by a cumulative 150bps this year.

FNB’s baseline scenario assumes that intense fighting continues until mid-2022 during which, the risk premia in global financial and commodity markets gradually decline and they have identified three channels through which the conflict could affect South Africa’s residential property market: cost of living or inflation and interest rates; trade or growth; and confidence.

Naturally, higher inflation, leading to higher interest rates, has a cooling effect on pipeline demand for mortgages, and eventually house price growth. Given the already elevated vacancy rates (weak demand) in the rental market, higher living costs (such as food, fuel, water, and electricity prices) will further limit the ability of landlords to raise rental prices and delay recovery”, says Siphamandla Mkhwanazi, Senior Economist at FNB.

However, these were already baked into our expectations. A more novel risk is the potential impact of ongoing tensions on buyer sentiment. This is because recent activity (and support to price growth) has been driven by the recovery in higher-priced segments, which tend to be highly sensitive to sentiment. If sentiment is significantly dampened as a result, then our expectations of a continued recovery in affluent segments in 2022 may, likewise, be dampened. For low and middle-priced segments, a lot will depend on the extent to which this translates into further labour market destruction, prompting lenders to significantly tighten lending standards. So far, this is not our base scenario”.

While the stagnant labour market, combined with rising interest rates and higher living costs, suggests a less supportive medium-term environment for home buyers, factors such as the ongoing shifts in housing needs and the banks’ appetite for quality lending could mitigate the impact.

According to FNB’s latest Residential Property Barometer, the affordable segment has shown the strongest recovery in activity following the harsh decline in 2020. In the middle-priced segments, buying activity remains strong but growth is moderating. Activity is supported by lower interest rates, credit availability, and pandemic-induced changes in housing needs.

Current buying activity is largely driven by demand recovery in the affluent markets, stoked by good pricing, the low interest rate environment, and the work-from-home trend.

The FNB House Price Index growth moved sideways during February, averaging 3.8% year-on-year. Price growth appears to have stabilised in the last few months, likely due to the receding supply of properties for sale on the market. In FNB’s previous report, support on overall house price growth in recent months has come from a strong recovery in the affluent markets, whilst growth in the low to middle-segments continue to slow.