Residential property market in more pain than you’d imagine

Battered by high interest rates, constrained consumers and an economy that’s barely growing, the South African residential property market is in poor shape. According to data from sector expert Lightstone Property, the number of transfers by first-time and repeat buyers is down by nearly a third compared to 2022.

However, mortgage advances (the value of outstanding home loan balances) seemingly remain ‘resilient’. There is more to this headline figure than meets the eye, though. In a very thoughtful report, FNB’s economics team explains that many homeowners were able to pay down or pre-pay their mortgage debt during lockdown (as there were precious few other spending opportunities).

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This has been unwinding, and “homeowners are drawing down on savings from excess payments made when interest rates were low to meet their daily needs or even to fund big-ticket items such as solar installations”.

In doing so, this props up overall mortgage debt despite very weak fundamentals. FNB says this clouds “the true extent of the underlying weakness in the homebuying market”.

Transfer activity is in steep decline. Transfers to first-time buyers are down by slightly more than those already in the market, but in value terms, the latter is ‘only’ down by 24% versus the 28% for new entrants.

		2022	2023	Change
First-time buyers	Transfers	144 653	101 878	-30%
	Value	R105bn	R75.5bn	-28%
Repeat buyers	Transfers	196 029	139 010	-29%
	Value	R240bn	R182.3bn	-24%
Total	Transfers	340 682	240 888	-29%
	Value	R345bn	R257.8bn	-25%

FNB says that from the most recent peak in 2020, volumes are down by more than 40%. As bad as this is, it is still better than the 69% drop between 2007 and 2009 in the aftermath of the global financial crisis.

The decline has been more pronounced among younger buyers, who are now more despondent than ever.

Share of volumes by age group

The bank’s economists show that the share of home loans granted to those under 35 has declined from 47% in the latter part of 2020 to 39.7% in Q3. This is a massive drop and is at the lowest level in nearly 15 years.

“This reflects the disproportionate impact of subdued economic activity and high interest rates on younger individuals, while stronger balance sheets often insulate older individuals”.

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FNB notes that “the declining home ownership levels among younger individuals predates the current cycle. In 2000, the below 35 age group accounted for 53.5% of mortgage volumes” compared to the 40% level for this year. It says this “has broader implications for wealth distribution in South Africa”.

Change in mortgage volumes by age group

Average mortgage sizes are down 2.5% to R1.3 million over the last year as consumers continue to ‘buy down’. This is where new and existing homeowners “seek cheaper options as affordability diminishes”.

Volumes of mortgages in the top 60% of the market (houses above R1.2 million) are down close to 28% year-on-year, according to FNB. This compares to a decline of ‘just’ 25% in the sub-R500 000 segment.

This is clearly primarily a problem of demand. Tellingly, the bank’s market strength indices for both demand and supply are in negative territory. It suggests that developers could be pulling back, plus the unfavourable selling conditions mean that some homeowners are revaluating their decisions to list their properties.

Unsurprisingly, Cape Town is the best-performing metropolitan region, with average house price growth of 3% in Q3. Joburg is the worst performer at -1.5%.

Lightstone’s data shows that the ‘semigration’ trend continues. During 2023, there were around 1 000 houses bought in KwaZulu-Natal, just under 2 000 in Gauteng and close to 6 500 in the Western Cape.

According to Lightstone, 21% of sellers are relocating to another town/province, and a further 14% are emigrating. Both of these metrics are significantly higher than those from FNB, which are 12% and 9%, respectively. However, this is across the entire market.

When looking at higher price segments (R2.6 million+), relocations are closer to 14% and emigration at 15%.

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Lightstone’s survey of estate agents shows that 38% of them met their sales targets for 2023. Despite the subdued environment, they are optimistic about next year, with more than double that figure (73%) expecting to reach these.

FNB is more circumspect. It expects “the weak house price growth trajectory to continue for a little while until inflation and borrowing costs ease more meaningfully” from the second half of next year. Until November, FNB says house price growth has averaged 1.6%, in line with its prediction of 1.5% for the year.

It says the market should bottom out during this quarter – price growth of 0.5% was reported in October and November – but “recovery will likely be moderate as interest rates gradually decline, and demand in the interest-rate sensitive segments slowly returns”.

Listen to this Property Pod episode with Suren Naidoo (or read the transcript here): 

You can also listen to this podcast on iono.fm here.

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