Market volumes may have peaked, but still running above pre-pandemic levels.
The affordable market has shown the strongest relative recovery in activity following a more pronounced decline in 2020, due to the harsher impact of the pandemic on lower-income households.
In middle priced segments, buying activity remains strong, but growth is moderating. Activity is supported by lower interest rates, credit availability and pandemic-induced changes in housing needs.
Current buying activity is largely driven by demand recovery in the affluent markets, stoked by good pricing (value for money following significant price declines in recent years), the low interest rate environment, and the work from home (WFH) trend.
Despite slowing volume growth, the value of mortgage extensions continues to trend higher. This reflects a shift towards higher-priced and larger properties. In 2021, the value of outstanding mortgage advances grew by 6.3% compared to 2020, the fastest pace since 2008.
Data shows that in the first nine months of 2021, the average mortgage size approved was approximately 16% higher and the average property size approximately 6% bigger, compared to the same period in 2019.
Interest rates are set to increase by at least an additional 100bps this year, on the back of rising inflationary pressures and less accommodative global monetary policy conditions. While this may have a cooling effect on market volumes (and eventually price growth), it is important to distinguish that the current wave of buying activity is predominantly driven by buyers who are less sensitive to interest rate hikes.
The stagnant labour market, combined with rising interest rates, suggests a less supportive medium-term environment for home buying activity. However, factors such as the ongoing shifts in housing needs, relatively ample credit and higher incomes could mitigate the impact.
We expect demand for property and real house price growth to wane as global financial conditions tighten. This could be exacerbated by upward inflationary pressure – buoyed by resurgent waves of Covid-19 infections and related supply chain disruptions. Steeper hiking cycles, as inflation continues to surprise to the upside, will likely have a bigger impact on emerging markets, given the pre-existing labour market vulnerabilities in these economies.
Domestic homebuying market
We expect buying activity to remain relatively supported in the medium term and price growth should stabilise at lower levels compared to 2021, at around 3.5%, from 4.2%. Higher interest rates will reduce affordability and the attractiveness of homeownership relative to renting. However, we think “marginal buyers” have already brought forward their buying decisions, taking advantage of ultra-low interest rates.
In the medium term, we expect that buying activity will predominantly be driven by less interest rate sensitive buyers, largely in higher priced brackets. Innovation and heightened competition among lenders should also boost activity. A key constraint is the stubbornly weak employment growth, which continues to lag the economic recovery.
However, the wage bill has recovered to pre-pandemic levels (albeit uneven across skill and income levels). This, combined with still-strong growth in non-labour income, and rising preference for homeownership (behavioural conditions), should counteract the downward pressures on volumes growth and, ultimately, house price growth, mainly in middle to higher-priced segments.
Domestic rental market
After troughing at 0.6% y/y in March 2021, rental inflation has been gradually normalising, lifting to 1.1% in December 2021. We expect rental inflation to lift to 2.0% on average in 2022, ending the year at around 2.5%.
This gradual normalisation is in line with the ongoing recovery in aggregate incomes and household demand, higher interest rates weighing on demand for homeownership, as well as improved mobility that might push people closer to business districts (for work). However, the pace of the recovery will be constrained by weak employment growth and rising cost of living.