Annual house price growth decelerates again in August

Annual house price growth decelerates again in August

MAIN IMAGE: Siphamandla Mkhwanazi, FNB Senior Economist

Danie Keet

“Our proprietary market strength indicators show that demand for houses is now moderating, following a strong rebound in 2H20 and into 2021. However, these are still above 2019 levels, reflecting the positive effect of lower interest rates on market activity and the changing housing needs due to the pandemic.”

This is the view of Siphamandla Mkhwanazi, FNB Senior Economist, on the latest indicators in the real estate industry.

The FNB HPI annual house price appreciation decelerated further to 2.6% y/y for August, from 3.4% in July (revised up from 3.1%).

“Mortgage extension continues to grow at a faster pace, while loan-to-price ratios are trending lower. Our investigations show that much of this credit is funding purchases in the middle- to upper-priced segments. As such, mortgage loan sizes have become bigger, reflecting a shift towards higher price brackets.

“Weaker-than-expected 2Q21 labour market data, combined with the potential adverse effects of the recent unrest on employment prospects for 3Q21, suggests that longer-term demand fundamentals will likely take longer to recover to pre-pandemic levels. However, we note a potential upside on non-wage income, especially dividend income, which could boost income growth for affluent households,” he said.

According to Mkhwanazi the proprietary market strength indicators show that demand is now moderating, following a strong rebound in 2H20 and into 2021. However, these are still above 2019

levels, reflecting the positive effect of lower interest rates on market activity and the changing housing needs due to the pandemic – greater adoption of working from home and home schooling.

Mortgage extension continues to grow at a faster pace, while loan-to-price ratios are trending lower. Investigations show that much of this credit is funding purchases in the middle- to upper-priced segments. As such, mortgage loan sizes have become bigger, reflecting a shift towards higher price brackets.

“Weaker-than-expected 2Q21 labour market data, combined with the potential adverse effects of the recent unrest on employment prospects for 3Q21, suggests that longer term demand fundamentals will likely take longer to recover to pre-pandemic levels.

“However, we note a potential upside on non-wage income, especially dividend income, which could boost income growth for affluent households.”

House price growth

The slowing pace of price growth coincides with the weakening market strength index as demand growth slows relative to supply. These indicators are derived from the internal property valuer’s

database. Activity of estate agents is also moderating across price segments, as shown in the latest FNB Estate Agents Survey. However, all these are still above 2019 levels, despite weaker employment numbers. In part, this suggests that market activity is still benefiting from lower interest rates, albeit to a lessening extent.

Current activity is also benefiting from pandemic-induced shifts in consumer behaviour, which leant in favour of home ownership.

Mortgage extension soars

Mortgage extension in July rose by 7.2% y/y, the quickest in 12 years (since May 2009). This seems at odds with all demand and market activity indicators (as outlined above), a conundrum compounded by the fact that loan-to-value ratios (proportion of the loan that lenders are willing to finance) have also descended from their recent highs in 4Q20.

“To explain this, the first thing to consider is growth in house prices in recent months. According to the FNB HPI, prices have risen by a cumulative 5.6% since January 2020.

“Second, and related to this, is the average loan size. Deeds registry data shows that this has become bigger, growing by 14.6% in the same period. In a similar vein, internal applications data shows the average purchase price has risen by 14.5% between January 2020 and July 2021. This is partly driven by higher house prices, and a demand-shift towards higher price brackets, facilitated by very low interest rates. So, while volumes and loan-to-price ratios may be slowing, which would imply slowing mortgage extension, the rise in purchase prices and loan sizes might have counteracted this, explaining the uptrend,” Mkhwanazi stated.

Outlook

“We have consistently argued that property prices have been unusually slow to adjust to the weak consumer fundamentals. We explained that support has come from unprecedented factors, such as historically low interest rates, the nature of the crisis, which incentivised property ownership,  the concerted response from lenders that smoothed the impact of severe job losses on housing markets (e.g. through payment holidays and loan restructuring), as well as the relative abundance of credit despite these job losses.

“However, recent data shows that market volumes may have peaked, and market strength is weakening. Nevertheless, these remain above 2019 levels.

“Thematically, the recent deceleration in house price growth is in line with our expectations – reflecting waning interest-rate induced demand and swelling labour market pressures. Demand driven by consumer shifts from renting to owning may also have peaked. This is reflected in the stabilising flat vacancy rates and bottoming rental inflation. These shifts played a vital role in supporting home-buying activity in 1H20 and into 2021, mostly in middle-priced segments. With this demand losing momentum, it is not surprising that the deceleration in house prices is more pronounced in middle-priced segments.

“Nevertheless, we still expect a better annual house price growth in 2021, reflecting comparatively stronger demand and a brighter GDP growth outlook,” Mkhwanazi concluded.

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