There has been an “unexpectedly rapid recovery” in the residential property market following the hard lockdown earlier this year, a new report by FNB found.
Until recently, experts predicted that house prices could fall by between 5% and 14.5% this year. Instead, house prices rose by 1.4% in the year to July, according to new FNB data.
“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,” says FNB senior economist Siphamandla Mkhwanazi. “In contrast, the volume of new mortgage applications has rebounded beyond the pre-lockdown levels, and across the price spectrum.”
And it looks like prospective home buyers reassessed their housing needs as a result of life in lockdown, he adds. Anecdotal evidence shows rising demand for bigger properties (mainly freestanding homes) – and not in SA’s biggest cities. “The growth of working from home is creating demand for bigger homes which can offer additional features such as home gyms, and conducive environments for home-schooling,” according to Mkhwanazi.
FNB research shows a strong increase in interest in property buying, reflected in web traffic to property websites.
This is thanks to the lowest mortgage rates in almost half a century. With prime at 7%, this means a monthly repayment of less than R8,000 a month on a bond of R1 million.
The low mortgage rates are incentivising renters to buy and first-time buyers to “front-load” their purchasing decisions.
“In other words, sales that would otherwise have taken place some time 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,” Mkhwanazi says.
There has also been pent-up demand from the hard lockdown period, where buying decisions were taken at the start of the year. 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.
FNB research shows that the supply of properties remains stronger than demand, but the gap has started narrowing from May. Some owners – particularly of pricier houses – may have taken their properties off the market as they re-assess their chances of selling their homes in a tough economy. Instead, they seem to be opting to refinance their mortgages – given historically low interest rates – to assist their finances.
According to FNB’s “market strength” indicator, compiled by its valuers, the property market is still currently 15% stronger than during the weakest point of the financial crisis more than a decade ago.
“Thus, the pandemic does not appear to have had as much of a chilling effect as we might have feared, at least at this stage,” Mkhwanazi says.
The coronavirus crisis has also not created exceptional market discounts. The average discount (difference between the final sale price and sellers’ initial asking price) was 12% in the second quarter, smaller than discount of 13% in the first quarter.
Looking ahead, FNB expects that the historically low interest rates and lower transfer duties (particularly in the middle-priced segment) will continue to support house prices in the very near term.
But it is worried about job losses in the wake of the coronavirus crisis.
“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,” predicts Mkhwanazi.