Fewer people have been able to buy homes over the past two years as higher inflation and rising interest rates bite into their monthly incomes.
And this was before yesterday’s shock announcement that the interest rate would be increased by 0.5%.
After an initial surge in home buying following the Covid pandemic, the increase in living costs started taking its toll.
Since 2021, home loan approvals have been dropping, reveals BetterBond’s inaugural Property Brief, which contains data and analysis from Roelof Botha, a research economist at the Gordon Institute of Business Science
The bond originator’s number of formally approved bond applications staged a “swift recovery from the worst effects of the Covid-19 pandemic” and then rebounded again, with the monthly average for 2021 rising by 31% over pre-pandemic 2019.
“Since 2021, however, higher inflation and rising interest rates have dampened home-loan based buying, with the average number of bond approvals dropping by 10% in 2022 and again in the first two months of 2023.”
As rising interest rates since the start of 2021 lead to subdued residential property market activity, home loan approvals dropped. The cost of credit measured against the prime overdraft rate, has increased by 54%, which the report states is “significant”.
“The Reserve Bank has been criticised for its reaction to higher inflation on the basis of the main causes of higher consumer prices. The latter can be attributed mainly to the rising costs of energy, fuel, and global freight shipping, none of which have led to demand-side inflation.”
Samuel Seeff, chairman of the Seeff Property Group says the rising interest rate – which is now at 11.25%, will affect buyers and homeowners by resulting in higher repayments of home loans and other credit, and put further pressure on the cost of living and disposable income.
However, the impact of the higher interest rate “is to some extent mitigated” by the continued favourable bank lending climate, which is still the best in over a decade.
“The increased transfer duty exemption threshold to R1.1 million is also a positive for buyers.”
While overall sales volumes have declined compared to the highs of 2021, Seeff says it remains business as usual with buying and selling continuing daily. The monthly transfers also still appear to be slightly ahead of the pre-pandemic levels.
Furthermore, although price appreciation continues to decline, standing at around 2% on average, the flat growth means that prices are unlikely to plummet compared to other global markets that experienced runaway price growth during the Covid-boom.
“The Seeff Property Group continues to assess the outlook for the property market as stable. That said, buyers have become more selective due to financial pressures, and while there is still a good market, it is now incumbent on sellers to set their prices at realistic levels if they want to sell.”
Home loan values going down
Not only have fewer people been able to afford to become property owners, but those that have been able to buy since 2021, have bought homes of lower values, the BetterBond report reveals. Although, in nominal terms, average house prices for all buyers reached “new highs” in 2022, it explains that, once this is adjusted for inflation, there is actually a “marginal decline”. This is “mainly due to financial pressures on consumers and home buyers since the beginning of last year”.
Home loan values have also dropped to 2021 levels, from the highs seen in mid-2022.
“Rising inflation and higher interest rates have eroded purchasing power for prospective home buyers, with the average value returning to the levels of early 2021,” the report says.
While a downward interest rate cycle – that could come by the end of this year – would bring much-needed relief to existing homeowners, and a valuable boost to property market confidence and buyer activity, Tony Clarke, managing director of the Rawson Property Group says the road ahead for property is not without its challenges.
“South Africa’s economic woes are weighing heavily on the property market. People are struggling to make ends meet, let alone save for big investments like property purchases. This, together with the rising costs of property finance, has steadily eroded the pool of qualified buyers.”
By weighting provincial property prices with their relative shares of the number of approved BetterBond home loan applications, the analysis found that the Western Cape still has the highest average property price. Average property prices in the North West province are the lowest, while, at R1.468 million, the Gauteng average house price is nearly identical to the national average of R1.465 million.
On average, says Herschel Jawitz, chief executive of Jawitz Properties, property prices are expected to increase this year by 2.75% to 3.5%, which means that, in real terms after inflation, property prices are declining by a similar amount.
“As long as inflation remains high amid low economic growth, real property price growth will remain marginal.”
However, he says the rationale behind yesterday’s decision to increase the interest rate “far outweighs the risks posed by sustained high inflation”.
“With inflation at 7%, there are very few sectors of the local residential market that are delivering inflation-beating growth in property prices.”
The BetterBond report states that semigration is set to continue and could lead to a growing divergence between house prices in the Western Cape and the rest of the country. There is a “broadly similar” semigration trend in areas like the KwaZulu-Natal north and south coasts.
“Greater Pretoria also remains attractive because of the location of government departments and the University of Pretoria, the largest residential campus in South Africa. Small, pristine towns in rural areas will also continue to experience demand as a result of semigration.”
When it comes to approved building plans, the growing importance of the residential property market in the Western Cape “should not be underestimated”.
“It has a strong structural dimension and could have an enduring, significant impact on house prices in the rest of the country.”
Plans that are approved today translate into new properties that come onto the market and bolster housing stocks in future.
While activity in the property market has slowed in the face of a variety of economic headwinds, Andrew Golding, chief executive of the Pam Golding Group, says it has remained “surprisingly resilient” due to the banks’ ongoing appetite to extend mortgages to home buyers, including first-time purchasers, and the relocation of homeowners from the interior to the coastal provinces, particularly the Western Cape.
“In addition, homes nationally change hands on a daily basis among those relocating, upsizing and downsizing for a variety of the usual reasons according to lifestyle and life stage changes – all of which has resulted in sustained activity in the residential property market.”
Buyers’ incomes have gone up
Over the past four years, BetterBond data shows a consistent increase in homebuyers’ income. Since Q1 2019, average income for the 31 to 40 age group increased by 22.9% to more than R47 500 per month. This group is followed by the 41 to 50 age group, with an increase of 20.5% to almost¬ R60 000 per month.
“Rising incomes bode well for growth in the residential property market, once interest rates start dropping.”
In another piece of positive insight, the report says that, over the past six years, home buying has been a “good hedge against inflation”.
“Since 2016, the average nominal house price increased by 8.6% for all buyers and 7.1% for first-time buyers, compared to average inflation over this period of 5%.”
Clarke says that, currently, property supply “significantly outweighs” demand in most areas, contributing to slow house price inflation (HPI). Lightstone statistics show that national HPI has been positive, but below inflation for some time.
“At the moment, there are very few investments that are keeping up with inflation. South Africa – and the world – is going through a very tough phase, and it’s hurting on all fronts, not just property. The one strength property has that other investments do not is its essential nature. No matter how hard things get, people will always need a roof over their heads.”
As such, Clarke says property remains one of the most predictable safe havens in which to protect and preserve personal wealth.
“It’s easy to forget that property is a long-term investment journey and all these highs and lows are a natural part of the landscape.
“My best advice right now is to buckle up, focus on protecting and improving your property’s value, and always consult with a property expert before making any big investment decisions.”
IOL BUSINESS