BetterBond has recently launched its Property Brief, a monthly overview of housing market trends and forecasts which contains data and expert analysis from Research Economist Dr Roelof Botha.
Real average house prices
In nominal terms, average house prices for all buyers reached new highs during 2022 but if adjusted for inflation, a marginal decline is seen, mainly due to financial pressure on consumers and homebuyers since the beginning of last year (figure 1). Over the past six years, homebuying has nevertheless been a good hedge against inflation. Since 2016, the average nominal house price increased by 8.6% for all buyers and 7.1% for first-time buyers, compared to average inflation over this period of 5%.
Home loan values back to 2021
Rising inflation and higher interest rates have eroded purchasing power for prospective homebuyers, with the average value returning to the levels of early 2021 (figure 2). The spread between home loans for first-time buyers and all buyers has declined, from 92.9% in the first quarter of 2019 to 86.2% during the first two months of 2023. Since Q1 2019, the average value of these home loans has outpaced inflation by a healthy margin. For all homebuyers, the average value increased by 8.6% per annum to R1.18 million and for first-time homebuyers by 10.8% per annum to R1.04 million at the end of 2022. During these four years, the consumer price index (CPI) only increased by 4.7%.
Property prices in large metros
Average residential property prices in the provinces that are home to the large metro municipalities remain higher than elsewhere (figure 3). BetterBond has calculated this by weighting the individual provincial prices with their relative shares of the number of approved BetterBond home loan applications. At R1.468 million, the Gauteng average house price is nearly identical to the national average of R1.465 million.
A solid increase in homebuyers’ income
Over the past four years, BetterBond data shows a consistent increase in homebuyers’ income. Since Q1 2019, average income for the 31- to 40-year-olds age group increased by 22.9% to more than R47 500 per month, followed by 41- to 50-year-olds, with an increase of 20.5% to almost R60 000 per month (figure 4). Rising incomes bode well for growth in the residential property market once rates start dropping.
The impact of interest rates
Orthodox macroeconomic theory tells us that higher interest rates are inversely correlated to GDP (figure 5) and higher interest rates generally lead to subdued residential property market activity. Unsurprisingly, therefore, bond approvals started dipping after the interest rate rise of November 2022, the first in three years. Since then, the cost of credit, measured against the prime overdraft rate, has increased by 54% which is significant.
The Reserve Bank has been criticized for its reaction to higher inflation on the basis of the main causes of higher consumer prices. The latter can mainly be attributed to the rising costs of energy, fuel, and global freight shipping – none of which have led to demand-side inflation.
Number of home loan approvals
BetterBond’s number of formally approved bond applications staged a swift recovery from the worst effects of Covid-19 and then rebounded again, with the monthly average for 2021 rising by 31% over pre-pandemic 2019. However, since 2021, higher inflation and rising interest rates have dampened home-loan based buying, with the average number of bond approvals dropping by 10% in 2022 and again in the first two months of 2023 (figure 6).
The rise of the Western Cape
Semigration is set to continue, and this could lead to a growing divergence between house prices in the Western Cape and the rest of the country. There is a broadly similar semigration trend in KwaZulu-Natal North and South Coast with Greater Pretoria remaining attractive because of the location of government departments and the University of Pretoria, the largest residential campus in SA.
Small pristine towns in rural areas will also continue to experience demand as a result of semigration. However, these transactions are unlikely to have a material impact on national average house prices and home loan volumes.
Approved building plans pointing the way to the future
The growing importance of the residential property market in the Western Cape should not be underestimated. It has a strong structural dimension which could have an enduring, significant impact on house prices in the rest of the country. Figure 8 shows the increase in the value of approved residential building plans by province. Plans that are approved today, translate into new properties that come onto the market and bolster housing stock in the future.