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Are we too dependent on interest rates to improve the market?

John Loos

MAIN IMAGE: John Loos – property economist at FNB Commercial Property Finance

Senior writer

“The residential market is far too small for the population,” says John Loos, economist at FNB Commercial Property Finance, which funds residential properties. We know this by the number of people not living in formal housing. A country’s goal needs to be to provide formal housing for everyone, for it can dramatically improve human well-being… and that’s what economic policy should be about.”

“The current situation is not just an economic issue but a matter of human dignity,” says Loos. With a backlog of more than two million houses, impacting roughly 12 million people, and almost two million households living in informal settlements, it is clear that the government’s efforts to uplift the poverty-stricken have fallen short.”

While, as Loos suggests, “economic strategies and policies aimed at higher growth translate into far higher employment and income, which increases the purchasing power required to be able to afford a home,” the decade-long stagnation of the economy has further disempowered the long-suffering disenfranchised. Worse, South Africa does not appear to be experiencing the same as other global nations that are boasting rising house prices year-on-year, such as the US, which grew 6.4% in December 2023 from 5.6% in the previous quarter.

Naturally, one must look to interest rates, which, let’s face it, impact all global residential property activities.

Are we too dependent on interest rates to improve the market?

“Unfortunately, given the structural constraints and resultant lack of economic growth in SA, residential market fluctuations are largely interest rate driven. And there is limited scope for interest rate stimulus for the housing market these days because interest rates are already relatively low, compared with, say, the 1990s,” John Loos, property economist at FNB Commercial Property Finance, explains. “These days rate cutting doesn’t produce the massive surge in demand that it did from the less-indebted household sector back in the early-2000s. Compounding the current market is household indebtedness, which remains relatively high, and this further dampens the interest rate cutting effect on housing demand.”

“The property market may ‘hope’ for interest rate cuts to boost short-term demand, and periodically, this happens, but in South Africa, new residential development remains mediocre.  New residential units completed in 2023 were -34,9% down on 2019 levels, and we also have to factor in that many households are content to remain outside of the formal housing market.”

Bearing in mind that FNB only forecasts for the approaching three years, in the current slow growth economy, and with only limited interest rate reduction in the coming cutting cycle predicted (prime declining from 11,75% only as far as 10,5% is FNB forecast), Loos expects that  it may take at least three years for building completions to grow back to a level exceeding the pre-Covid 19 levels. “FNB forecasts an average house price growth of 1,4% in 2024, accelerating to 3,8% by 2026. Such rates remain below forecast inflation, thus translating into a decline in real inflation-adjusted housing values.”

Loos also doesn’t believe that the elections will play a major role in the market’s performance in the next month or two. “We know that economic growth was a weak 0,6% in 2023, so not much help for the residential market from that. Some extra stimulus is expected from July onward, however, when FNB expects the start of a mild interest rate-cutting cycle. But no fireworks are expected.

“For us at Commercial Property Finance,  this part of the market has weakened significantly since interest rates started to rise in 2021 and normally lags the recovery in the existing market. So I think we will have to wait until 2025 before the new development market turns noticeably stronger,” concludes Loos.

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