Good news for homeowners – with a big catch

South Africa’s housing market appears to have turned a corner, with FNB’s House Price Index accelerating to 1.2% year-on-year in January.

While still subdued, this marks the index’s highest growth rate since June 2023, supported mainly by easing financial pressure on South Africans and reduced interest rates. 

However, on an inflation-adjusted basis, the index is still in negative territory.

FNB economist Siphamandla Mkhwanazi pointed out that the recovery has not been as strong as initially expected after several interest rate cuts from the Reserve Bank. 

Mortgage lending conditions have shown a modest improvement, with the average loan-to-value ratio rising to 95.1% in the fourth quarter of 2024. 

This signals cautious optimism among lenders and buyers as banks gradually loosen lending standards in response to an improving economic backdrop.

Mkhwanazi said the positive impact of interest rate cuts on the South African residential market has so far been felt most keenly by estate agents. 

There has been a noticeable reduction in South Africans relying on unsecured credit to make deposits on property purchases. 

Instead, buyers are increasingly using personal savings, indicating that financial pressure on individuals has eased to provide them with more disposable income. 

However, under the new two-pot system, in some cases, these deposits have been paid for using savings from retirement accounts. 

While this allows buyers to fund deposits without resorting to high-interest-rate debt, it also negatively impacts their retirement outcomes. 

A combination of access to retirement savings and reduced financial pressure has resulted in first-time buyer participation rising from 20% to 25% of total market activity. 

The same trend was observed when the Reserve Bank cut interest rates to support the local economy through pandemic-era lockdowns. 

First-time buyers are increasingly purchasing property within the affordable segment, which indicates some caution and may prevent repayment lapses in the future. 

Despite this uptick from first-time buyers, their participation in the market remains below levels seen in the past, suggesting affordability constraints are still preventing a full recovery among this cohort. 

There has also been a noticeable rise in buy-to-let property investments, which have increased to 12% of the total market activity. 

This trend shows that households with stronger balance sheets are seeking alternative investments to generate cash flow. 

On the surface, this all points to the beginning of a recovery in the housing market, with homeowners set to benefit as demand rises. 

However, the FNB House Price Index is measured in nominal terms, which means that it does not account for inflation. 

On an inflation-adjusted basis, the index is still in deep negative territory of around -2%. 

While this is a far better position than it has been in the past few years, it still means that, on an inflation-adjusted basis, housing market activity is declining year over year. 

The last time the FNB House Price Index was in positive territory was in 2021 and 2022 when the Reserve Bank cut rates sharply to boost the economy. 

The Reserve Bank has cut interest rates by a cumulative 75 basis points in its current cutting cycle, providing some relief for South Africans. 

However, interest rates remain higher than their pre-pandemic levels and are significantly elevated compared to the period the House Price Index was last in positive territory on an inflation-adjusted basis. 

Elevated interest rates not only subdue buying and selling activity in the residential property market but also significantly increase households’ debt-servicing costs. 

Nedbank chief economist Nicky Weimar recently explained that household debt as a share of disposable income has risen to 62.2%. 

Households’ cost of servicing debt relative to disposable income remained broadly unchanged at 9.1% in the third quarter of 2024.

In addition to the rise in household debt burdens, debt-servicing costs have also risen due to higher interest rates. 

The Reserve Bank has hiked rates by 475 basis points since November 2021 in response to rising inflation in South Africa. 

This took interest rates to a 15-year high, where the bank kept them for over a year until the first 25 basis point cut in September 2024. 

There is a significant delay between raising interest rates and the impact felt by households, with the lag period typically around six months.

The same lag applies when interest rates are cut – the relief is not immediate. 

Weimar expects the cutting cycle to continue. As the effects of interest rate cuts filter through the economy, demand for residential property should rise.