The FNB HPI was unchanged at 3.5% year-on-year in December, taking the average annual house price growth to 3.6% year-on-year for 2019, from 3.8% year-on-year in 2018. This is marginally above FNB’s forecast of an average annual growth of 3.5% year-on-year.
After a slow start to the year, the combination of a mild improvement in demand, progressive mortgage lending as well as attractive market pricing supported the residential property market in 2H19. Nevertheless, depressed labour markets continue to weigh on household finances, which poses a threat to sustained demand growth. Market strength indicators continue to show a narrowing demand-supply gap, which may have also provided support to house price growth in 2H19.
Area value bands suggest that pressure persists in the “affluent” areas, while low-income areas have remained resilient. This is due, in part, to the divergent demand-supply trends in the respective segments. In 3Q19 higher-priced areas (areas whose average purchase price corresponds to the top 20% of the price distribution) averaged -0.5% year-on-year, while low-income areas (areas whose average purchase price is in the bottom 20% of the price distribution) averaged 16.7% year-on-year. Sellers in the upper end have constantly had to reduce their asking prices to close the deal, while low-income areas are also supported by robust buy-to-let activity.
FNB’s outlook for 2020
South African economic growth is expected to remain muted over the forecast horizon, weighed on by the weak fiscal position, weak labour markets impacting negatively on income growth and therefore consumers’ spending power, as well as fragile business confidence. Concerningly for households, and as hinted in the October mini-budget statement, higher taxes could be on the cards. These could come in the form of bracket creep or higher tax rates or a combination of both. This could exert further pressure on disposable income, and thereby consumer demand. Positively, however, inflation is expected to be relatively benign, with a possibility of one more 25bps rate cut by the SARB on the horizon. This should provide marginal support to consumers’ discretionary income. Our expectation is for real GDP growth to lift slightly to 0.9% in 2020, from a low 0.3% estimated for 2019.
For the residential property market, FNB expects broader economic developments, especially employment growth, to continue dictating the longer-term trends. Positively, demand (for mortgages) has shown mild signs of improvement across all price segments. At the same time, some sellers withdrew their properties on the market for resale amid unfavourable selling conditions. This has somewhat curtailed the pace of supply. Nevertheless, there is still a robust supply of new stock, as well as emigration-related sales. On the other hand, inbound demand (i.e. from foreigners buying a property in South Africa as well as from South African ex-pats buying property locally) remains comparatively subdued. As mentioned above, the supply of new stock is expected to continue correcting and adjusting to lower demand levels.
More positively, mortgage advances have been progressive in recent months and LTPs have been rising. This has helped inject liquidity in the market. However, these benefits have mainly accrued to the higher-priced segments, with lending in the lower end remaining broadly conservative. Given our expectation of muted disposable income growth, this support will likely wane as 2020 progresses. We forecast average annual house price growth of 3.7% for 2020, which is still below our inflation forecast of 4.3% in the same period. House prices will be weighed on mainly by tepid disposable income growth, as well as low sentiment levels. Marginal support will come mainly from lower interest rates as well as the ongoing readjustment in the supply of new-build stock.
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