Benign inflation and rate cuts boost housing market outlook amid improving Rand and global sentiment: Property Barometer

Forecast changes

FNB have revised their inflation outlook downward, primarily due to a quicker strengthening in the rand exchange rate as domestic political uncertainty has eased and global sentiment improves. This adjustment has led us to anticipate an earlier interest rate cutting cycle.

They now forecast two 25bps repo rate cuts this year and another 25bps cut early next year. Furthermore, we have increased our GDP growth forecast, reflecting 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.

Impact on housing market

These adjustments suggest a slightly more optimistic outlook for buying activity and house price growth in the coming years. Improved economic activity, a more benign inflation environment, and looser monetary policy could improve affordability for potential homebuyers, stimulate demand and support house price growth.

Current market conditions

The FNB House Price Index (HPI) growth averaged 0.6% y/y in August, unchanged from the previous month. Notably, the slowing trend appears to have stabilised since May and is expected to show a clearer upward trend once interest rates begin to decline.

‘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.’

In the mortgage market, growth in mortgage extensions slowed to 2.5% in July from 2.7% in June, reflecting subdued demand and house prices, as well as stringent lending criteria. The Deeds data suggests that while loan-to-price (LTP) ratios have stabilised, mortgage volumes are still declining, albeit at a slower pace, due to reduced demand as deteriorating affordability results in lower approval rates.

The rental market exhibits 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.

While high interest rates may favour renting over buying, this 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.

On 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.

Overall, 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.

Download Report Here