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Why hasn’t SA’s housing market crashed despite rising interest rates?

Why hasn’t SA’s housing market crashed despite rising interest rates?

Make no mistake, rising interest rates have had an impact on the market. The number of residential property transfers registered in the deeds offices has been on a downward trend in 2022, suggesting that fewer people are buying homes. But house prices haven’t crashed and commercial banks are still keen to extend mortgages.

The housing market has been one of the few bright spots for SA’s economy since the start of the Covid-19 pandemic, with ultra-low interest rates fuelling property purchases and creating boom-like conditions. 

First-time home buyers entered the housing market in their droves and existing homeowners upgraded into more spacious homes, resulting in the value of property sales in SA more than doubling from R69-billion in 2020 to R153-billion in 2021. The growth trend is set to continue in 2022, with housing sales expected to surpass R156-billion.  

But there are signs that the two-year-long exuberance in the housing market is coming to an end, owing to rising interest rates and surging fuel and food prices that are increasing the cost of living. The housing market is also slowing down around the world, with UBS Global Wealth Management warning in October that “significant” corrections in house prices and property sales can be expected in a number of cities in the US, Canada, Europe and Asia.   

Back to the trend in SA. Although the total value of property sales continues to increase, the number of residential property transfers registered in the deeds offices has been on a downward trend in 2022. The latest figures from the data analytics group Lightstone show the number of residential transfers registered in the third quarter of 2022 dropped to 60,700, down from the second quarter’s 77,880 and the first quarter’s 129,642.  

The decline doesn’t necessarily mean that the housing market is in a brutal meltdown, because the value of property sales and the number of property transfers remain elevated compared to the pre-Covid period of 2019 (See below).

Source: Lightstone

Industry players say property sales started to taper off at a faster rate from July this year when the SA Reserve Bank increased interest rates by 0.75% — the first large hike since the central bank started lifting rates in November 2021. The bank, which cut interest rates by three percentage points at the height of the Covid-19 pandemic to provide relief to households and businesses, started increasing interest rates to fight rising consumer inflation. 

Since November 2021, the Reserve Bank has increased interest rates by a cumulative 3.5%, taking the interest that commercial banks charge on home loans (known as a prime lending rate) from a near 50-year low of 7% to 10.5%. This interest rate has reached pre-pandemic levels.  

In addition to the lower number of properties sold, house prices across SA are another pressure point. House prices are still increasing, but at a slower rate. According to FNB, house prices grew on average by an unchanged rate of 3.4% in July and August, down from the peak of 5.1% recorded in April 2021 at the height of the Covid lockdown. In real terms or after adjusting for the consumer inflation rate (measuring at 7.4% in November), house prices are going backwards — a trend that was prevalent even before the start of the pandemic.  

In a note, FNB economists Siphamandla Mkhwanazi and Koketso Mano say the slower house price growth from pandemic/lockdown highs (the 5.1% recorded in April 2021) reflects “relatively softer demand [for property purchases] amid higher living costs and the waning interest rate support.”  

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Commercial banks support home-buying activity  

Mkhwanazi and Mano argue that the marginal growth in house prices and value of property sales, suggesting that the housing market remains “resilient”, has been driven by fierce competition among commercial banks. They want to grow their market share in the mortgage market and their appetite for extending home loans to would-be or existing homeowners is still strong.  

Underscoring this is that figures from mortgage originator ooba show that the extension of mortgage loans to consumers grew by a “healthy and resilient” 7.1% in August compared to a year ago. In its recent reporting period (six months to the end of June 2022), Absa has seen a similar level of growth, as its mortgages extended to consumers grew by 8% to R312-billion. Over the same reporting period, Nedbank’s mortgage extensions grew by 5% to R180-billion, while Standard Bank grew its home loans book by 7.5%. 

Commercial banks continue to grant home loans at attractive interest rate concessions (reductions in interest rates), at an average prime lending rate minus 0.30% in the third quarter. In October alone, the concession grew to 0.54%, which is the most competitive pricing seen since the final years of the 2008/09 recession. Before the pandemic, banks were typically offering home loans with an interest rate of prime plus 2%.  

To further entice more buyers into the housing market, commercial banks are demanding smaller upfront cash deposits on home loans. For example, the loan-to-price ratio was sitting at about 95% during the third quarter, meaning that prospective homeowners were required to put in a cash deposit of at least 5% of the purchase price of a home. Before the pandemic, loan-to-price ratios typically sat at a lower percentage of about 90%, meaning that consumers had to put down larger deposits.  

SA’s housing market should, in theory, be crashing considering that the economy is in the doldrums, the unemployment crisis is worsening, and interest rates are set to continue rising in 2023, affecting affordability. FNB alone expects interest rate cuts from early 2024.  

Despite these pressures, Mkhwanazi and Mano don’t expect a housing market crash, saying house prices and buying activity are likely to slow down but remain resilient. The pair’s expectations remain rather optimistic and they have pencilled in average growth in house prices of 3.5% in 2022 and 3.4% in 2023, slightly down from 2021’s 4.2%.  

Mkhwanazi and Mano say factors that will support the housing market include “stronger post-pandemic household balance sheets and a strong recovery in non-labour income for higher-income households as well as competition and innovation in the mortgage market, particularly in the affordable market”. 

The bad news is that consumers in the affordable and middle-priced housing market, with homes typically valued below R3-million, are expected to be the most sensitive to interest rate increases, which will have an impact on their affordability and home-buying activity. Buying activity, especially among first-time home buyers, has already slowed in response to the rate hikes.  

The good news is that house price growth in SA is strongest in the affordable and middle-priced housing segment rather than in the luxury property market, where properties are typically priced from R5-million upwards (see below). 

Return of international buyers 

Although luxury properties are not clocking up higher price growth, Samuel Seeff, chairman of the Seeff Property Group, says there is still strong demand for such properties. 

Seeff has seen most of the demand for properties in the Western Cape, a demand driven by the continuation of the “semigration” trend (people moving from one part of the country to another) and the return of foreign buyers since the economy opened up under eased Covid regulations. 

“We have already seen a notable uptick in sales above the R10-million to R15-million mark for the first time since 2017 in the Cape. Prices are likely to hold firmly and may even push up. If there is a level of semigration to the KZN North Coast and certain Eastern Cape areas, we may also see it play out positively in terms of prices,” says Seeff. 

Andrew Golding, chief executive of the Pam Golding Property group, agrees with Seeff, saying there has been increasing buying activity in the luxury market by foreign/international buyers. 

“Most international buyers mention that the value offered by our properties is significant and the lifestyle compelling — ranking with the best on offer elsewhere in the world, while this segment of the market remains unaffected by interest rate hikes. Buyers with meaningful resources are also keen to diversify their investments while simultaneously benefiting from living in properties providing outstanding views, lifestyle and amenities.”  

International buyers in the past 12 months made up 4% of Pam Golding’s total buyers. The international buyers are from Germany, the UK, Zimbabwe, the US, the Netherlands, Switzerland, Botswana, France, Nigeria and Congo. DM/BM


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