By Siphamandla Mkhwanazi & Koketso Mano.
Property prices maintain positive momentum in August
The FNB House Price Index (HPI) accelerated to 4.5% y/y in August, up from a revised 4.4% in July (previously 3.7%) (Figure 1). This marks the fastest annual house price growth in over three years, last seen in May 2022 when interest rates were significantly lower (275-basis points below current levels). This is also the fourth consecutive month of real house price growth.
Regional performance
The Western Cape continues to lead in house price growth, underpinned by robust demand fundamentals. Meanwhile, Gauteng and KwaZulu-Natal (KZN), which showed stagnant growth earlier in the year, are now gaining momentum (Figure 2). Recent data points to a turning point for these regions, with price growth picking up from a relatively low base. As a result, the gap between the Western Cape and other provinces is narrowing, with broader regional contributions suggesting a geographically expanding recovery.
Mortgage lending trends
Despite improving demand and rising prices, mortgage lending remains subdued, indicating that the recovery is not yet credit driven. According to South African Reserve Bank (SARB) data, outstanding mortgage balances grew only 2.0% y/y in July, a rate that has remained in a narrow range for several months (Figure 3). This reflects a muted expansion in housing credit, suggesting that banks are not significantly increasing new mortgage lending, and/or consumers are cautious about taking on more housing debt. Either way, credit prudence continues to dominate.
Property prices maintain positive momentum in August
Despite improving demand and rising prices, mortgage lending remains subdued, indicating that the recovery is not yet credit driven. According to South African Reserve Bank (SARB) data, outstanding mortgage balances grew only 2.0% y/y in July, a rate that has remained in a narrow range for several months (Figure 3). This reflects a muted expansion in housing credit, suggesting that banks are not significantly increasing new mortgage lending, and/or consumers are cautious about taking on more housing debt. Either way, credit prudence continues to dominate.
Outlook
A key question going forward is whether the credit cycle will begin to reinforce the housing market recovery. If interest rates remain stable or decline further, improved affordability could encourage more buyers to finance purchases, and banks may become more willing to extend home loans. A pickup in mortgage lending would provide an additional tailwind to sustain house price growth.
In the meantime, the combination of cooling inflation, dovish monetary policy, and pent-up housing demand suggests that the positive momentum in house prices is likely to continue in the near term. The market resilience, evidenced by house prices rising faster than inflation even in a high-rate environment, is encouraging. However, a broader-based recovery would be more assured if accompanied by a rebound in credit growth. We will be watching these developments closely in the coming months.
ADDENDUM - NOTES:
Note on The FNB House Price Index:
The 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 this year, 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. As such, we anticipate a marginal decline in annual volumes, and slower price growth in the segment. That said, we are 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.
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well- known Case-Shiller methodology which is used to compile the Standard & Poor's Case-Shiller Home Price Indices in the United States.
This "repeat sales approach" is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month's sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB's own valuations database, thus based on the residential properties financed by FNB.
We apply certain "filters" and cut-offs to eliminate "outliers" in the data. They main ones are as follows:
Note on the FNB Valuers' Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple "good (100)", "average (50)", and "weak (0)". From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers' Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
