The FNB HPI shows resilience in price growth.
Key themes:
- The pandemic has not had as chilling an effect as initially expected: prices growth has held up and volumes reached multi-year highs, particularly in middle-priced segments, in contrast to initial expectations.
- The aggressive reduction in interest rates (and mortgage rates), good pricing and lower transfer duties have momentarily improved mortgage affordability and incentivised renters to buy property. In part, this has contributed to rising flat vacancies and, subsequently, low rental inflation.
- The impact of the pandemic on labour markets has been disproportionate: low-paying occupations have been more severely affected, and professionals relatively insulated. In part, this explains an uptick in property sales due to financial pressure in lower-priced segments. In wealthy segments, however, income losses are exacerbated by their exposure to financial markets (mainly via dividends), corporate income (self-employment) and rental income.
- Overall, the impact of the pandemic is more visible in the rental market, relative to the home buying market.
The FNB House Price Index (HPI) shows annual house price growth flatlined in October at 2.6% y/y. 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 R500k, using FNB transaction data) averaging 11.4% y/y in 3Q20. On the opposite end the spectrum, the top 20% (>R1.9m) averaged 0.7% y/y 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. Year-to-date, applications volumes are approximately 9% above the same period in 2019. However, approvals lag as lenders apply caution 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. Furthermore, liquidity in the market has remained relatively intact. Approval rates are slowly recovering from their recent lows in May/June during the height of lockdown (and subsequently, risk cuts from lenders) and have now cleared the long-term average. Loan-to-value ratios (estimated from Deeds data) also continue to tick up, mainly driven by market forces: first-time buyers generally require higher LTVs, but there is also stiff market competition among lenders.
The improved affordability (lower acquisition and repayment costs) and increased demand has, inadvertently, offered sellers a bit more room to negotiate: the FNB Estate Agents Survey shows that the average discount from the listing price has pulled back somewhat, from 13% in 1Q20 to 11% in 3Q20. As a result, price reductions have not been as large as initially feared, underpinning resistance in house prices.
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 2021.
