Residential price growth ‘bottomed’ during Q4 2023, according to FNB’s latest Residential Property Barometer, but the bank believes a noticeable upward trend should occur during the second half of 2024 – once affordability improves.
Data suggests that mortgage volumes have declined by 28% to date, as affordability pressures keep buyers at bay, and others seeking ‘cheaper’ properties, as reflected by the compression in average loan sizes. Similarly, data suggests that house price growth may also have reached its lowest level since the Global Financial Crisis (GFC) during Q4 2023. However, lower-priced segments outperformed, reflecting the buying-down effect and the persistent supply shortages. Some high value segments, particularly in regions along the Western Cape’s coastline, gained support from semigration which now seems to be normalising.
While affordability pressures should ease, FNB says that it is unlikely that a rapid rebound in activity and house price growth will occur in 2024. The bank projects home buying activity to move sideways in the near term, at levels 10% below the pre-pandemic average (2015 and 2019) but to pick up steadily over the forecast horizon. The gradual decline in inflation and borrowing costs, combined with employment gains, should stimulate demand over the medium term which could see volumes revert by 2025.
In the longer term, volumes should stabilise modestly above pre-pandemic levels, supported by improved sentiment; employment, and income gains; lower interest rates; faster population growth, as well as innovation and widening access to credit markets. FNB expects volumes to grow by 0.8% this year, before lifting by 12.7% in 2025.
From a valuation’s perspective, the subdued house price growth trajectory is likely to persist – until the lagged impact of lower inflation and borrowing costs filters through, from late 2024 to early 2025. In the longer term, house price growth will be supported by improved GDP growth, and a combination of stronger demand for housing and improved structural affordability, following the persistence real house price correction since the GFC.
Rental inflation remains much lower than headline inflation, which is expected to average 5.2% this year, reflecting relative slack in the market with demand yet to fully recover from the adverse effects of the pandemic. While vacancy rates have dropped from a peak of 13.3% at the height of Covid-19, the latest data suggests renewed pressure building up as vacancies crept higher in Q4 2023 to 8.1% from 6.9% in Q3 2023 – materially higher than the pre-pandemic level of 5.4% between 2017 and 2019.
The continued conversion of office space to residential rental space, particularly in areas with high office density, may keep vacancies elevated.
The anticipated turn in the interest rates cycle will provide less support for the rental market with these factors likely to keep a tight lid on rental escalations in 2024. FNB anticipates rental inflation to average 3.2% in 2024, from 2.6% on average in 2023.
FNB’s predictions for each of the segments:
Affordable market: The buying-down effect, combined with stock shortages, helped sustain volumes and property price growth in lower priced segments in 2023. This shift in buying patterns will be less supportive during 2024 as affordability eases. In addition, the interest rate reprieve will filter through with a longer lag, as some prospective buyers take time to repair their credit records. FNB anticipates a marginal decline in annual volumes, and slower price growth in the segment but the bank remains encouraged by the continued innovations in the segment to improve access and affordability, such as longer mortgage terms; collective buying options; and more streamlined administration of FLISP. These will continue to support activity.
Middle-priced segments: Activity will likely benefit from lower inflation and interest rates with expectations of continued job gains in 2024; and increased competition in credit markets. Price growth should lift moderately from the low levels seen in 2023 but remain below inflation. Nevertheless, following the persistent real house price correction since the GFC, structural affordability, as measured by price-to-income ratio, has improved overtime. This should help support longer-term housing demand, resulting in stronger house prices in the outer years.
Affluent markets: After a productive 2021 and 2022, marked by favourable pricing, a recovery in non-labour income, improved balance sheets in the aftermath of the pandemic, and the rise of remote work, buying activity declined sharply in 2023, weighing on property values. The semigration trend is also normalising, providing less support to high-end property demand in coastal towns. On the positive side, sales related to emigration have slowed, and anecdotal evidence suggests an increase in South African expats buying local property in higher-priced segments. Ultimately, sentiment will be an important determinant of market outcomes, and subject to event risks such as the February Budget and National Election outcomes. FNB expects volumes to move relatively sideways this year, and a price growth trajectory with a mild negative bias.
