Referring to the latest FNB property barometer, FNB senior economist Siphamandla Mkhwanazi says the pandemic has not had the negative effect on house prices as initially expected. The FNB House Price Index (HPI) shows annual house price growth flatlined in October at 2.6% year on year. Despite the mild reflation in recent months, the overall residential property price growth remains below inflation, as has been the case for most of the last decade.
Lower priced properties are performing better, with the bottom 20% of price distribution (values below R500,000, using FNB transaction data) averaging 11.4% year on year in the third quarter this year. On the opposite end of the spectrum, the top 20% (>R1,9m) averaged 0.7% year on year in the same period. Despite the pandemic, industry-wide data shows bourgeoning home-buying activity, with the volume of mortgage applications reaching multi-year highs.
But, he says, although the year-to-date applications volumes are approximately 9% above the same period in 2019, approvals lag as lenders are being cautious amid an uncertain economic outlook, only outpacing 2019 levels by approximately 1.5% year to date. “In our view, activity is shored up by lower interest rates, attractive market pricing, lower transfer duties and the changing housing needs due to the pandemic,” he says. “Furthermore, liquidity in the market has remained relatively intact. Approval rates are slowly recovering from their recent lows in May and June during the height of the lockdown, and subsequently, risk cuts from lenders, and have now cleared the long-term average.”
Loan-to-value ratios (LTVs), estimated from Deeds data, also continue to tick up, mainly driven by market forces: first-time buyers generally require higher LTVs, but there’s also stiff market competition among lenders. The FNB Estate Agents Survey shows that more affordable properties and higher demand gave sellers a bit more room to negotiate. The survey shows that the average discount from the listing price has pulled back slightly, from 13% in the first quarter to 11% in the third quarter.
As a result, price reductions have not been as large as initially feared, underpinning resistance in house prices. “Price growth has held up and volumes reached multi-year highs, particularly in middle-priced segments, in contrast to initial expectations. Notwithstanding, income pressures pose a significant downside risk in the coming quarters. For instance, if job losses spread to more white-collar occupations, we should expect further weaknesses in house price growth into next year,” Mkhwanazi says.