When Covid-19 made its way into South Africa in early 2020, several property economists and industry players predicted that house prices would fall off a cliff — similar to the devastation seen during the 2008 global financial crisis. 

South African house prices, which usually track the country’s economic performance, shrank by 5.4% in 2008 while the domestic economy (in a recession) fell by 1.5% over the same period. 

Citing the global financial crisis as an example, economists and forecasters said the Covid-19 lockdown — a black swan or unpredictable event — would have a similar impact on the real estate market in 2020. Commercial banks, estate agents and mortgage originators predicted that house prices would fall by 10%-20%. 

After all, house prices and home-buying activity were already in the doldrums pre-Covid-19, lending credence to highly pessimistic forecasts. 

But the forecasts were far off the mark as the housing market staged an extraordinary and unexpected performance. According to Lightstone, house prices grew by an average of 3% for 2020 as a whole. After factoring in average consumer price inflation (3.3% in 2020), house prices fell by 0.3% — a much lower downward spiral than seen in most other sectors of the South African economy. 

Banks disburse home loans 

Commercial banks are even reporting a renewed home ownership interest by consumers. 

Standard Bank, which has a 34.5% share of South Africa’s home loan market, said new home loans granted in South Africa “reached record levels” in 2020. South Africa’s largest home loan provider received 258,000 new applications and disbursed R56.5-billion in mortgage loans in 2020, a 13% increase compared with 2019. Other banks are reporting similar activity; Absa’s mortgage loan disbursements grew by R8.1-billion in 2020, and FirstRand, which owns FNB, saw a growth of R4.6-billion over the same period. 

All banks saw a growth in home loan disbursements in the past six months of 2020, a period in which South Africa eased lockdown rules. The easing of lockdown rules meant that people were allowed to move from or into their homes, and also paved the way for deeds offices around the country to reopen and record property sales transactions. 

But 2020 wasn’t a spectacular year in terms of property transactions. Using property transactions registered in the deeds office, Lightstone said 89,090 properties (amounting to R157.7-billion) were sold by December 2020, compared with 261,097 properties (amounting to R210-billion) sold in December 2019, and 315,899 properties (amounting to R243-billion) in December 2018.

Low interest rates

So, how do we reconcile the growth in house prices and renewed buying interest when South Africa’s economy and consumer affordability is still in the doldrums?

First, South Africa’s housing market has been supported by the Reserve Bank’s decision to cut interest rates by three percentage points, which brought the bank’s prime lending rate to a near 50-year low of 7%. This made it more affordable for existing homeowners to pay off home loans, but also made the cost of home ownership cheaper than it was at the start of 2020. Taking into account main home ownership costs such as the (now lower) prime lending rate and transfer duty (a tax levied on properties valued above R1-million), industry players say the series of interest rate cuts have made homeownership about 30% cheaper. 

In practice, this has resulted in a flood of first-time buyers into the home ownership market, said Seeff Property Group chair Samuel Seeff. “They [first-time homebuyers] are keen to get an offer to purchase signed and accepted as quickly as possible so that they do not lose out. At the same time, the banks are still keen to lend and first-time buyers can find favourable conditions,” he said. 

Andrew Golding, CEO of Pam Golding Property Group, has agreed with Seeff, saying he has seen marked home-buying activity in the house price category of R700,000 to R1.5-million — a bracket favoured by first-time buyers in 2020. 

Historically low interest rates have also made it easier for existing homeowners to sell and upgrade to larger homes. “We continue to experience consistently busy activity in the price bands not only below, but also from R1.5-million upwards, including the luxury market in excess of R10-million,” said Golding. 

Other existing homeowners are distressed sellers and can no longer keep up with mortgage payments due to job losses or salary cuts caused by the lockdown. Others were selling to free up the equity in their homes that accumulated over several years to either pay off debt or downgrade their lifestyles by moving into smaller homes. The above scenarios create a demand, selling, and purchasing activity, which favourably affects house prices. 

Forecasts

The lockdown has made forecasting in any industry extremely difficult. Lightstone expects house prices to accelerate between 2.1% and 5.2% in 2021, adding that this forecast will depend on how fast the economy recovers and returns to pre-Covid-19 levels and whether property transactions increase or decrease due to the “pent-up demand that works its way out of the market” or further lockdown restrictions. 

Golding of Pam Golding Property Group is cautious about the future.

“Realistically, the robust pace of residential property activity seen during the latter part of 2020 as lockdown restrictions were eased… is unlikely to be sustained throughout 2021. In part, this reflects the fact that some of that activity was due to pent-up demand created during the initial lockdown, while other buyers were responding to the aggressive interest rate cuts.” DM/BM