By Siphamandla Mkhwanazi & Koketso Mano.
A sluggish recovery: Will more rate cuts revitalise the housing market?
The FNB House Price Index (HPI) remained stable at 1.4% y/y in February, unchanged from the revised January figure (previously 1.2%) (Figure 1). While growth remains modest, this represents the strongest performance since 1H23. Supporting this trend, market strength indicators suggest a gradual recovery, with demand growth slightly outpacing the supply of properties for sale, albeit at still subdued levels.
Regionally, price growth remains highly concentrated. Provincially, growth was observed in the Western Cape, Mpumalanga, and the North West. In contrast, Gauteng and KwaZulu-Natal (KZN) showed stagnant growth, while other provinces continued to experience negative growth. At the metropolitan level, Cape Town and Ekurhuleni are driving growth, Johannesburg and Tshwane are stabilising, and the remaining metros are still contracting.
Shifting consumer behaviour and mortgage lending trends
The current low price growth aligns with the tepid growth in mortgage demand and supply. In January, mortgage extensions averaged 2.3% and have remained at this level for the past six months. This is despite indications of easing lending standards. Notably, between August and December 2024, the South African Reserve Bank (SARB) reduced policy interest rates by 50 basis points (bps). During this period, the weighted average interest rate on flexible mortgages (the dominant type) decreased by 55bps, 5bps more than the policy rate reduction. Furthermore, the loan-to-value (LTV) ratio-the proportion of the purchase price lenders are willing to finance- increased by 17bps, from 94.98% to 95.15% during the same period. Compared to 4Q19, the LTV ratio has risen by 3.2-percentage points (ppts), from 91.95%. However, data from the Deeds Office indicates that transaction volumes remain significantly below pre-pandemic levels. While 4Q24 volumes showed a modest 1.4% y/y increase, they are still 16.7% lower than the 4Q19 levels. This suggests a protracted housing market recovery, despite the improved lending parameters.
Overall, it appears that a disconnect exists between the positive sentiment reported by estate agents, whose activity rating reached a two-year high in 4Q24, and the restrained market outcomes. This gap points to a lingering psychological reluctance among buyers, stemming from the pandemic-induced cost-of-living crisis. It could also suggest that many potential buyers are still encountering obstacles during the home-buying process, likely due to affordability-related issues.
Despite these current challenges, the gradual easing of interest rates and expected improvements in economic growth provide a basis for our cautiously optimistic outlook. We project house price growth to climb to 1.7% in 2025 and approach the 3% mark by 2026.
ADDENDUM - NOTES:
Note on The FNB House Price Index:
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well-known Case-Shiller methodology which is used to compile the Standard & Poor's Case-Shiller Home Price Indices in the United States
This "repeat sales "" is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month's sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB's own valuations database, thus based on the residential properties financed by FNB.
We apply certain "filters" and cut-offs to eliminate "outliers" in the data. They main ones are as follows:
Note on the FNB Valuers' Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple "good (100)", "average (50)", and "weak (0)". From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers' Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
The rising presence of both first-time buyers and buy-to-let investors in lower-priced segments underscores strong affordability-driven demand and improving confidence in property as an investment class. If wage growth continues to outpace inflation (for example, as suggested by BankservAfrica Take-home Pay Index1) and interest rates decline further, housing demand-both for ownership and rental purposes-should strengthen. We project the FNB HPI to climb towards 1.7% in 2025, with a gradual acceleration to exceed 3% by 2026, as market fundamentals continue to improve.
The BankservAfrica Take-home Pay Index (BTPI), which tracks the average take-home pay of approximately 4 million salary earners in South Africa, grew by 9.7% average in real terms in the three months to January 2025
Note on The FNB House Price Index:
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well-known Case-Shiller methodology which is used to compile the Standard & Poor's Case-Shiller Home Price Indices in the United States.
This "repeat sales approach" is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month's sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB's own valuations database, thus based on the residential properties financed by FNB.
We apply certain "filters" and cut-offs to eliminate "outliers" in the data. They main ones are as follows:
Long term Fundamental view
Note on the FNB Valuers' Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple "good (100)", "average (50)", and "weak (0)". From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers' Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
