Housing Price Index March 2020
House price growth slowing; web traffic to property portals recovering
The FNB House Price Index (HPI) showed that house price appreciation slowed to 2.8% y/y in March, the lowest print since May 2011 (i.e. in close to 9 years). Importantly, the HPI is based on FNB’s mortgage approvals and mainly covers the period before South Africa went into lockdown on 27 March 2020. As such, the impact of the lockdown on volumes and prices is yet to reflect in the data.
- FNB Market Strength Index (a composite index that gauges demand and supply strength, collected from a database of property valuers) has, since the beginning of this year, revealed a slowing trend in supply, and a deeper decline in demand (and thus reversing some of the 2H19 gains made).
- This is on the back of heightened uncertainty over job security and souring sentiment due to a material deterioration in the economic outlook.
- Disaggregation of the data by price segments shows that, on balance, the higher end market remains in excess supply, while the bottom end is still in structural supply-deficit. We expect these dynamics to play a crucial role in determining house price paths this year.
- We expect mass job losses and heightened uncertainty to result in a sharp drop in transaction volumes, as buyers delay their purchasing decisions.
- Preliminary deeds data shows that market volumes have declined by an estimated 40% y/y.
- Interestingly, however, search engine data shows a rebound in web traffic to property portals in SA since lockdown (this is also a worldwide phenomenon).
- While too early to definitively draw conclusions, this could be an early indication of burgeoning bargain hunting by investor buyers and/or pent-up demand from first-time buyers looking to capitalise on potential distressed selling.
Could we expect pent-up demand post Covid-19?
- Empirical evidence suggests that pandemics tend to have a sharp but short-lived impact on property markets, and that volumes tend to suffer more than prices. Market reports in developed countries, such as the US and UK, suggest that Covid-19 will have a similar impact – a short-term decline in transaction volumes (and prices) and a swift rebound.
- Among key distinctions between SA and these countries is the divergent labour market trends prior to the Covid-19 shock. Robust employment growth in these countries built a strong demand base, which resulted in stock shortages and thus a surge in house prices.
- Thus, a sudden drop in house prices could unleash pent-up demand from first-time buyers and investor buyers (buy-to-let purchases). The historically low interest rates in the developed countries (close to 0% versus 4.25% repo rate in SA) will only galvanise this demand, and thus facilitate a swift rebound in prices.
- Unfortunately, conditions are not as favourable in SA. Notwithstanding prospects for further interest rates reduction, the uninspiring employment outlook effectively limits any prospects for such pent-up demand in SA.
What lies ahead?
- We expect Covid-19 to have a sharp but short-lived impact on SA’s housing market. We expect that transaction volumes will, in the short term, take a bigger hit relative to prices. In contrast to international housing markets, however, the overall recovery in SA will likely be drawn out due to pre-existing weakness in consumer fundamentals.
- While aggressive cuts in interest rates, and possibly a reduction in house prices, will eventually support purchasing activity, in the short term this will likely be outweighed by heightened uncertainty and second-round effects on the labour market.
- In the end, the magnitude and endurance of this weakness will depend primarily on a rebound in the broader economy, sustained liquidity in the property market and material improvement in sentiment. The impact could linger for longer if liquidity dries up and lending standards tighten a tad more than we expect. We will keep a close eye on developments and revise our forecasts as more data becomes available.