‘Stringent lending criteria’ blaimed for sluggish mortgage extensions as House Price Index remains unchanged

House price growth in South Africa has remained unchanged at 0.6% year-on-year in August, from July.

Siphamandla Mkhwanazi, FNB Senior Economist, says the slowing trend appears to have stabilised since May and is expected to show a clearer upward trend once interest rates begin to decline.

The FNB House Price Index (HPI) published on Tuesday is based on the data on housing transactions. It gives people insights into what is happening in the housing market, including data on buyers, sellers, and investors.

Mortgage market

Mkhwanazi says growth in mortgage extensions slowed to 2.5% in July from 2.7% in June. “The slowed growth reflects subdued demand and house prices, as well as stringent lending criteria.”

The deeds data suggests that mortgage volumes are still declining, despite loan-to-price (LTP) ratios stabilising. However, mortgage volumes are declining at a slower pace, this can be attributed to reduced demand as deteriorating affordability results in lower approval rates.

Rental market

He says they have noticed that the rental market showed mixed trends. “Rental inflation fell slightly to 3.2% in the second quarter of 2024 from 3.3% previously.

However, Rode’s residential survey data indicates that vacancy rates for flats have decreased, albeit remain higher than pre-pandemic levels, suggesting a relative surplus of rental properties.”

Quoting Rode’s residential survey data, he explains that high interest rates may favour renting over buying but the data suggests that this has not been sufficient to absorb the excess supply, potentially due to a sluggish labour market.

“In addition, our 2Q24 Estate Agent Survey results suggest that most households that are selling due to financial pressure would rather downscale than go back into the rental market.”

ALSO READ: Which SA province offers the lowest rent for a house?

Inflation outlook

“We have revised our inflation outlook downward, primarily due to a quicker strengthening in the rand exchange rate as domestic political uncertainty has eased and global sentiment improves,” says Mkhwanazi.

He adds that the adjustment has led them to anticipate an earlier interest rate-cutting cycle. “We now forecast two 25bps repo rate cuts this year and another 25bps cut early next year.”

They have also increased their gross domestic product growth forecast, which he says reflects the easing of energy constraints, lower inflation, anticipated interest rate cuts, improved market sentiment, and refined assumptions regarding the impact of the two-pot pension system.

Current market conditions

When it comes to the supply side, the volume of new-build housing stock is declining, mirroring the subdued demand. “This downturn is particularly pronounced in the <80 square metre category, which primarily represents affordable housing.”

Mkhwanazi concludes that while the housing market continues to grapple with challenges posed by high interest rates and a sluggish job market, the forecast for a more benign inflation environment and an impending rate-cutting cycle offers a glimmer of hope for a gradual recovery.

“However, the extent and timing of this recovery will depend on various factors, including the trajectory of inflation, economic growth, and broader global conditions.”

NOW READ: How to enter Gauteng’s property market: Tips for first-time buyers