Good news for South African homeowners

Benign inflation and South Africa’s upcoming rate-cutting cycle offer a glimmer of hope to the local housing market in 2024.

This was revealed in FNB’s latest Property Barometer for September 2024. In this report, FNB economists Siphamandla Mkhwanazi and Koketso Mano said the bank has revised its inflation outlook downward.

This is primarily due to a quicker strengthening in the rand exchange rate as domestic political uncertainty has eased and global sentiment improves. 

“This adjustment has led us to anticipate an earlier interest rate-cutting cycle,” they said. 

“We now forecast two 25 basis points repo rate cuts this year and another 25 basis points cut early next year.”

The Reserve Bank’s Monetary Policy Committee (MPC) will meet again in September, where many experts believe it will vote to cut rates in South Africa for the first time in years.

South Africa has been in a hiking cycle since November 2021, when the MPC started raising interest rates in an effort to tame the country’s high, sticky inflation.

The committee has raised interest rates by a cumulative 475 basis points in this cycle, bringing the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.

Their efforts have been largely successful. The latest inflation print shows CPI at 4.6%, close to the midpoint of the SARB’s 3% to 6% inflation target range.

However, FNB’s economists warned that a more aggressive slowing in inflation or the real Federal Funds Rate poses a downside risk to their projection.

In addition, FNB increased its GDP growth forecast based on the easing of energy constraints, lower inflation, anticipated interest rate cuts, improved market sentiment, and refined assumptions regarding the impact of the two-pot pension system in South Africa.

The economists explained that these adjustments suggest a slightly more optimistic outlook for buying activity and house price growth in the coming years. 

“Improved economic activity, a more benign inflation environment, and looser monetary policy could improve affordability for potential homebuyers, stimulate demand and support house price growth,” they said.

“While we maintain our predictions for 2024 and 2025, we have revised our forecasts upward for 2026 from 3.3% to 3.6%.”

The FNB House Price Index (HPI) growth averaged 0.6% year-on-year in August, unchanged from the previous month. 

Year-to-date, the FNB HPI has averaged 0.8%, down from 1.8% in 2023 and 4.7% in 2022 in the same period. 

“This highlights how lower disposable incomes and a higher cost of credit have adversely impacted demand and, subsequently, house prices,” they explained. 

“Notably, the slowing trend appears to have stabilised since May and is expected to show a clearer upward trend once interest rates begin to decline.”

In the mortgage market, growth in mortgage extensions slowed to 2.5% in July from 2.7% in June, reflecting subdued demand and house prices, as well as stringent lending criteria. 

The Deeds data suggests that while loan-to-price (LTP) ratios have stabilised, mortgage volumes are still declining, albeit at a slower pace.

The economists explained this is due to reduced demand as deteriorating affordability results in lower approval rates. 

Year-to-date, LTP has averaged 94.5%, slightly below the 94.7% average in the same period last year. 

Volumes, however, have declined by 12.0% in the same period, having troughed at around -30% in the second half of 2023.

“Overall, while the housing market continues to grapple with challenges posed by high interest rates and a sluggish job market, the forecast for a more benign inflation environment and an impending rate-cutting cycle offers a glimmer of hope for a gradual recovery,” they said. 

“However, the extent and timing of this recovery will depend on various factors, including the trajectory of inflation, economic growth, and broader global conditions.”