South African house price slump

Nominal prices in South Africa’s housing market grew by only 2.5% in the first two months of 2023 – a significant decrease from 4.2% in 2022.

The 2023 Q1 Rode’s Report on the South African Property Market said the decrease is due to lower effective demand for property due to the weakening economy, higher cost of living and rising interest rates.

This report showed the country’s nominal and real house prices declined sharply following the boom seen in 2020/21.

This boom was made possible by lowering the prime interest rate to 7% to support households financially during the Covid-19 pandemic. Currently, the prime interest rate stands at 11.25%.

This high prime lending rate results from nine consecutive interest rate hikes since November 2021, which have led to higher monthly mortgage instalments.

For example, a R1 million, 20-year loan now requires a monthly mortgage of R10,492 rather than R7,752.

Buy or sell

Jawitz Properties CEO Herschel Jawitz said that after another interest rate hike in March, property prices are expected to increase by 2.75% to 3.5% on average. 

“This means that, in real terms, after inflation, property prices are declining by a similar amount,” he said. “As long as inflation remains high amid low economic growth, real property price growth will remain marginal.”

He warned that homeowners under pressure to make their bond repayments should contact their bank and find ways to reduce their expenses to avoid being forced to sell or default on their payments. 

Selling a property is not advisable in the current environment, particularly if someone has a large bond relative to the market value of their property.

However, for buyers with the means to buy, “the current market is offering good value buying opportunities”. 

“In addition, bank lending remains positive, and the rate concession banks are currently offering are very competitive.”

Electricity crisis

The report explains that, apart from the interest rate hiking cycle impacting homeowners and property companies, the electricity crisis is also “top of mind”.

The costs associated with ongoing load-shedding cannot be fully recovered from tenants, and property owners, therefore, also have to bear the brunt of these costs. 

This cuts into the earnings and, ultimately, dividends declared by Real Estate Investment Trusts (REIT) and adds to tenants’ occupancy costs. 

While the current interest rate hiking cycle is expected to end as soon as mid-2023, the decline in the growth of house prices is not expected to be short-lived.

“We expect nominal house prices to grow slower in 2023 and 2024 due to the weak economy, high unemployment and increasing interest rates,” said the report.

“The severe electricity supply crisis is a huge headwind for the economy. Therefore, don’t expect real house-price growth soon.”

Some reasons for this continued slow growth are:

• Slow economic growth
• Financial pressure on South African consumers due to high inflation and rising interest rates
• High unemployment
• Rising utility costs
• Dysfunctional and indebted municipalities 

There is some good news on the horizon for the country’s property market.

The report showed that the recent financial results of REITs for the period ended December generally fared better than expected.

Particularly, REITs exposed to retail and industrial property performed well, while exposure to the office market dragged down the results of others.