‘W-shaped’ recovery for residential property market, predicts FNB

Despite an unexpected “rapid recovery” in residential property market activity since the easing of Covid-19 lockdown restrictions, FNB’s property economist Siphamandla Mkhwanazi expects a W-shaped recovery.

Mkhwanazi points out in the latest FNB Residential Property Barometer, published on Tuesday (for the month ending July 2020), that annual house price growth rebounded to 1.4% year on year (y/y) in July 2020. This is compared to the upwardly revised growth of 0.7% in June and 0.6% in May.

“Our initial expectations were for the pandemic to have a more chilling and lingering impact on activity, with pent-up demand filtering through only later this year. In contrast, the volume of new mortgage applications has rebounded beyond the pre-lockdown levels, and across the price spectrum,” he notes.

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“This is also supported by the volume of buyer leads, derived from web traffic to property portals, which has risen above expectations,” he adds.

The July rebound in house price growth is in line with growth of 1.4% in March; however, worth noting is that this level is well below inflation and is still less than half the average growth experienced last year.

South Africa last experienced such low house price growth in November 2009 (+1.2%), around the tail-end of the global financial crisis.

Mkhwanazi believes pent-up demand is one of the key drivers for the rebound in July, in addition to record-low interest rates and lower transfer duties. However, he is not so convinced this will be sustained, hence his prediction of a likely W-shaped recovery as opposed to a V-shaped one.

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“There is still a great deal of uncertainty around the lasting impact of the [Covid-19] pandemic … Our expectation of a significant weakening in labour market conditions implies a greater downward pressure on house prices in the medium term,” he says.

“Thus, while a ‘V-shape’ recovery is apparent in the data, labour market tailwinds could have a more chilling effect ahead, leading to another drop in activity and thus a likely ‘W-shape’ recovery.”

“In our view, the current pent-up demand will likely not be sustained, and is unlikely to replace the demand lost due to very weak labour market outcomes,” he explains.

Commenting on the pent-up demand, Mkhwanazi notes in the report that buying decisions were taken before the commencement of the lockdown. “Some of these are delayed purchases, on the back of significantly lower transfer duties announced in the February 2020 budget, which came into effect in April this year,” he says.

“Second[ly], the record low mortgage rates are incentivising renters to buy and first-time buyers to front-load their purchasing decisions as monthly mortgage payments have come down significantly. In other words, sales that would otherwise have taken place sometime in future are happening now, with some buyers looking to fix mortgage rates while they are at record lows, fearing that they might increase in the near future,” he adds.

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Mkhwanazi also points to “early signs of behavioural shifts” with homeowners reassessing their housing needs and preferences as a result of life in lockdown.

“Anecdotal evidence shows rising demand for bigger properties [mainly freestanding homes], notably in less crowded ‘second-tier’ cities,” he says.

“The growth [in] working from home is creating demand for bigger homes which can offer additional features such as home gyms, and conducive environments for home-schooling.”