South Africa’s housing market remains weak

October 30, 2023

South Africa’s housing market remains fragile, amidst surging inflation and rising interest rates, coupled with a weakening economy.

The Repeat Sales House Price Index rose by a meager 1.1% in July 2023 as compared to the same month last year, its second lowest y-o-y price increase since October 2009, according to figures released by the First National Bank (FNB). In fact, when adjusted for inflation, prices actually declined by 3.51% over the same period. Real prices have been falling since May 2021.

South Africa’s house price annual change

Demand is now decreasing, with residential market activity weakening in Q2 2023 compared to the previous year. The time-on-market, which refers to the number of days a property has been for sale from the listing date to the date the contract is signed, increased dramatically to 12 weeks and one day in Q2 2023, up from 9 weeks and 4 days in Q2 2022. Moreover, tax data shows that property transfer duties in the country dropped 10.3% y-o-y in the first half of 2023.

“The FNB House Price Index growth slowed to 1.1% y/y in July, down from 1.6% in June. This is in line with the continued decline in buying activity, with mortgage volumes now tracking closer to pre-pandemic levels. The average bond amount, estimated from deeds data, declined by approximately 3% in 2Q23, the first decline in 14 years (since 2Q09). Similarly, year-to-date tax data reveals that property transfer duties are down by 10.3% compared to the same period last year,” said the FNB.

“In addition to lower demand, these indicators signify a downscaling trend by buyers, along with tightening of lending standards amid higher borrowing costs and affordability constraints.”

South Africa’s housing market has been sluggish over the past several years, mainly due to high unemployment, weak household finances, and an underdeveloped mortgage market. From 2007 to 2021, house prices rose by about 69% but when adjusted for inflation, real prices actually fell 19%.

Then in 2022, nominal house prices rose by a modest 2.9% but declined by 4.28% in real terms. With inflation surging again, the gap between nominal and real prices has been rapidly widening.

South Africa’s housing market is expected to weaken further in the coming months, amidst the continued decline in property demand. “The residential property market in South Africa faces some headwinds in the near term as economic activity remains subdued and interest rate increases filter through. We now project that average house price growth will slow down to 1.8% y/y in 2023, compared to 3.5% in 2022, and a forecast of 2.1% at the beginning of the year,” said the FNB.

“The main factors behind this downward revision are the weaker-than-expected GDP growth, which affects household income and demand, and the higher interest rates, which increase the cost of borrowing and dampen affordability. In addition, tighter lending standards and somber sentiment should weigh on home buying activity.”

After registering a post-pandemic growth of 4.9% in 2021, South Africa’s economic growth slowed to 2% in 2022, amidst the fallout of the war in Ukraine coupled with several domestic setbacks, such as floods and energy crisis. The SA economy will likely post a meager growth of 0.7% this year, according to the South African Reserve Bank (SARB), the country’s central bank. The 2023 economic growth forecast from the International Monetary Fund (IMF) is not significantly different, at 0.9%.

South Africa is Africa’s second-biggest economy. With a population of 60.6 million and a GDP per capita of US$6,685 in 2022, it has formidable manufacturing and financial sectors. It is the world’s largest exporter of gold and platinum. Tourism is also a key source of foreign exchange.

Recalling the boom years

During South Africa’s housing boom (from 2000 to 2006), house prices rose by an average of 20% annually. These price rises peaked in October 2004 with 35.7% annual growth (32.5% in real terms), according to ABSA.

The boom was driven by 4 main factors:

The emergence of a financially stable black middle class, which had a tremendous impact on housing demand, encouraged by individual tax reliefs, in the context of a growing economy.
South Africans who had parked money offshore during the Apartheid era were allowed (and required) to bring it back by September 2004. Much of this money went into property.
Better stability and security helped. During Apartheid and its sequel, property prices had badly lagged the economy, as the security situation went from bad to worse.
Lastly, the Financial Sector Charter in 2003 boosted mortgage loan growth. Financial institutions committed to providing ZAR 42 billion (US$2.23 billion) of housing finance to the low-income market. Then in 2006, the CGT exemption on primary residences was raised from ZAR 1 million (US$ 53,177) to ZAR 1.5 million (US$ 79,765). Transfer duties on properties were lowered too. For example, no transfer duty is payable on properties valued at ZAR500,000 (US$ 26,588) or less.

However the boom ground to a halt following the global financial crisis. From 2008 to 2009 house prices fell by 3.2% (-16.5% in real terms). Aside from the global crisis and rising interest rates, the decline in prices was prompted by the implementation of the National Credit Act in mid-2007, which aimed to protect borrowers from over-indebtedness, by limiting the amount of funds that can be borrowed and requiring every lender to assess borrowers’ credit-worthiness. It requires lenders to disclose every term in the contract and gives the borrowers the right to request their credit report, and to challenge the report if there are inaccuracies. The act has tended to reduce the supply of mortgage loans.

The housing market rose a little in 2010, encouraged by South Africa hosting the 19th FIFA World Cup, and from 2011 to 2019, house prices have risen by almost 51%. But after the ravages of inflation are deducted, that works out at a meager 0.4% growth in real terms.

House prices rose by a total of 8% in 2020 and 2021, amidst the Covid-19 pandemic. Yet when adjusted for inflation, prices actually declined by 1.1% over the same period. During 2022, nominal house prices rose by a modest 2.9% but fell by 4.28% in real terms.

HOUSE PRICES, ANNUAL CHANGE (%)
Year	Nominal	Inflation-adjusted
2008	-5.08	-13.16
2009	2.03	-3.90
2010	3.10	-0.23
2011	4.36	-1.84
2012	5.77	-0.04
2013	7.72	2.35
2014	6.20	0.82
2015	6.32	1.08
2016	4.75	-2.16
2017	3.85	-0.62
2018	4.12	-0.27
2019	3.10	-0.90
2020	4.10	0.99
2021	3.70	-2.06
2022	2.90	-4.28
Sources: FNB, Global Property Guide

Residential construction activity continues to weaken

Residential construction in South Africa is now declining, amidst rising energy prices coupled with supply chain disruptions of key construction materials due to the Russia-Ukraine conflict.

During 2022, the total number of residential building plans approved fell by 4.7% y-o-y to 49,689 dwelling units, in sharp contrast to a huge increase of 34.8% in 2021, according to Statistics South Africa (Stats SA). On the other hand, residential dwelling completions increased by a meager 0.5% to 32,758 units last year, following a surge of 35.1% in the prior year.

The weakness of the housing market continued this year, with both residential approvals and dwelling completions falling further.

For residential building approvals:

For houses measuring less than 80 sq. m, approvals plunged by 28.9% y-o-y to 5,023 units in the first seven months of 2023.
For houses measuring 80 sq. m and above, approvals were down by 23% y-o-y to 7,377 units in Jan-Jul 2023.
For flats and townhouses, approvals plummeted by 33% y-o-y to 10,393 units over the same period.

For residential completions:

For houses measuring less than 80 sq. m, completions fell by 9.8% y-o-y to 4,796 units in the first seven months of 2023.
For houses measuring 80 sq. m and above, completions were down by 11.6% to 4,851 units in Jan-Jul 2023 from the same period last year.
For flats and townhouses, completions fell by 20.9% y-o-y to 6,214 units over the same period.

South Africa Residential Construction Activity graph

Market activity is still weak

Demand continues to fall, with residential market activity in South Africa weakening in Q2 2023 compared to the previous year, amidst rising interest rates, coupled with a weaker economic outlook.

The time-on-market, which refers to the number of days a property has been for sale from the listing date to the date the contract is signed, increased dramatically to 12 weeks and one day in Q2 2023, up from 9 weeks and 4 days in Q2 2022. Though it is still slightly below the long-term average of around 13 weeks.

All other indicators also point to declining market activity:

Tax data shows that property transfer duties in the country dropped 10.3% y-o-y in the first half of 2023, according to FNB’s July 2023 Property Barometer report.
The average bond amount, estimated from deeds data, declined by approximately 3% in 2Q 2023, the first decline in 14 years.

Foreign home buying remains muted

Given South Africa’s economic stagnation, aggravated by the Covid-19 pandemic and the global economic and geopolitical uncertainty, it is maybe not surprising that home-buying by foreigners has declined in recent years, even though property in South Africa is now dramatically less expensive for foreign buyers than a decade ago.

Even taking into account the recent appreciation of the rand on the back of higher metals prices, the value of the local currency remained almost 60% lower against the US dollar from September 2011 to September 2023, falling from US$ 1 = ZAR 7.58 to US$ 1 = ZAR 18.97. Yet foreign homebuyers represent only 3.74% of total home buying in South Africa, significantly down from its peak of 6.5% in 2008.

South Africa Monthly Average Exchange Rates graph

Inbound demand (i.e. from foreigners buying property in South Africa as well as from South African expats buying property locally) has remained comparatively subdued in recent years.

FNB attributed this to:

Weak investor sentiment towards South Africa, due to the country’s multi-year economic stagnation
Uncertainty about the country’s future economic policy
Negative news, such as credit rating downgrades to “junk status”

Most foreign owners in South Africa are based in Europe, mostly in the United Kingdom, as well as Germany, Italy, Holland, and France. There are also buyers from African countries such as Mozambique, Zimbabwe, Angola, Cameroon, and Nigeria. Some homebuyers from China and Dubai are also eyeing properties in the KwaZulu-Natal and the Durban area, according to Craig Hutchison, chief executive of Engel &Völkers Southern Africa.

Foreigners can own immovable property in South Africa without restriction. However, all foreign funds remitted to the country must be declared and documented. The property must also be endorsed ‘non-resident’, as a condition for repatriation of funds.

Non-resident investors have to pay Capital Gains Tax when they later sell their properties. The purchaser of the property is required to deduct a prescribed percentage from the proceeds of the sale and remit it directly to the South African Revenue Service before paying the balance to the seller.

Rising interest rates

In September 2023, the South African Reserve Bank (SARB), the country’s central bank, kept its benchmark repo rate at 8.25%, following ten consecutive rate hikes in less than two years, in an effort to rein in inflationary pressures. The repo rate is now at its highest in about 14 years.

“Headline inflation returned to below the upper end of the inflation target range in June. In the coming months, we expect headline inflation to rise somewhat, before sustainably reverting to the midpoint of the target range in 2025. Against this backdrop, the MPC decided to keep the repurchase rate at its current level of 8.25% per year,” said the central bank.

“At the current repurchase rate level, the policy is restrictive, consistent with the inflation outlook and elevated inflation expectations. Serious upside risks to the inflation outlook remain. In light of these risks, the Committee remains vigilant and stands ready to act should risks begin to materialize,” the central bank added.

In line with this, prime and variable mortgage rates are now rising. In August 2023, the predominant rate on new mortgage loans stood at 11.75%, up from 9% in the previous year and 7% two years ago.

South Africa Africa Mortgage Advances Growth and Interest Rates graph

Housing loans continue to rise, but the size of the mortgage market remains steady

Despite increasing interest rates, housing loans continue to rise modestly, amid an increased willingness of banks to provide loans to prospective borrowers. In August 2023, total mortgage advances rose by 5% to about ZAR 1.81 trillion (US$98.24 billion), slightly up from its annual average growth of 4.6% in 2009-22, down sharply from an average growth of 21% in 2002-08.

“Loan-to-price ratios, a proxy for loan-to-value, have continued to rise, suggesting willingness by lenders to finance a bigger proportion of the purchase price,” said the FNB. “....the surge in LTPs predates the pandemic – it began in 2017 – and is largely attributed to intense competition among lenders in a thin volume market.”

This is supported by other local market experts. “Property ownership is now more accessible...Potentially renters may be able to buy a home at a lower monthly cost than their current rental payment,” said Rhys Dyer, chief executive of home loan comparison service firm, Ooba.

Despite this, the size of the mortgage market relative to GDP remains more or less steady. As a percentage of GDP, the mortgage market stood at nearly 27% in 2022, almost unchanged in the past six years but still down from an average of 34% of GDP in 2009-2011.

“Over the last ten years, the mortgage market has not made notable expansions, but instead has remained fairly steady, at an average of 122,000 bonds issued a year,” said the Centre for Affordable Housing Finance in Africa (CAHF).

South Africa Mortgage Advances graph

Household finances are troublingly weak, aggravated by high unemployment

Many households in South Africa are under financial strain, because of slow economic growth and low employment levels. The net household savings rate stood at -0.5% of disposable income in Q2 2023. Moreover, the ratio of household debt to disposable income increased slightly to 62.5% in Q2 2023 from 62.3% in the previous quarter, according to SARB’s September 2023 Quarterly Bulletin. Yet it remains lower than the 77% recorded two years ago.

“Household debt to disposable income edged higher to 62.5% in the second quarter of 2023 as the pace of increase in the seasonally adjusted level of debt marginally outpaced growth in nominal disposable income,” said the central bank.

Households’ debt-service cost to disposable income also increased to 8.8% in Q2 2023, from 8.4% in the previous quarter, 8.5% in 2020, and 9.4% in 2019, reflecting the combination of higher debt and substantial increase in interest rates in recent months.

Total outstanding household debt in the country grew by an annual average rate of 5.2% from 2015 to 2022 and reached ZAR 2.78 trillion (US$151.3 billion) in Q2 2023. Of which, credit extended by banks accounted for 75%, while non-bank institutions accounted for the remaining 25%. Mortgage advances, the largest credit category, represented about 45.7% of the total household debt in Q2 2023.

South Africa Net Household Savings Rate graph

The very high unemployment rate has been exacerbated by the health crisis in the previous years. In Q2 2023, the official unemployment rate was 32.6%, slightly down from 32.9% in the previous quarter but remains higher than the 29.1% before the pandemic, according to Stats SA. When the expanded definition is used, which includes those discouraged from seeking work, the jobless rate actually stood at 42.1% during the latest quarter.

The total number of unemployed people totaled 7.921 million in Q2 2023, down by 11,000 as compared to the previous quarter and by 73,000 from the same period last year.

South Africa Unemployment Rate Percentage graph

Rental yields are good

Despite all this, from one perspective property owners should be happy. In Johannesburg, gross rental yields for apartments, i.e., the gross rental return on a property if fully rented out, are good, ranging from 9.22% to 15.9%, with a city average of 11.72% in Q3 2023, according to recent research conducted by the Global Property Guide.

The most desirable neighborhoods in Johannesburg are in the north of the city, including suburbs like Dunkeld, Hyde Park, Houghton, Illovo, Inanda, Melrose, Parkhurst, Parktown, Parkview, Sandhurst, Saxonwold, and Westcliff. Nelson Mandela has a house in Houghton.

In Cape Town, gross rental yields on apartments are lower, currently ranging from 5.05% to 11.9%, with a city average of 7.52%.

Cape Town is the most popular tourist destination in Africa. Its amazing beaches and weather are ideal for retirees and foreign property buyers. Atlantic Seaboard properties are among the most sought-after because of the beaches and cliffs - upscale neighborhoods like Bakoven, Bantry Bay, Camps, Clifton, Fresnaye, Green Point, and Mouille Point. Some houses nestled on cliffs have sweeping views of the Atlantic Ocean. City Bowl, which includes the central business district of Cape Town, is another upscale residential suburb. It is one of the most stable residential markets in Cape Town, because of its prime central location and vibrant cosmopolitan lifestyle.

In other locations, during Q3 2023:

In Durban, gross rental yields for apartments range from 6.76% to 12.28%, with a city average of 10.24%.
In Centurion, gross rental yields range from 9.71% to 12.37%, with a city average of 10.76%.
In KZN South Coast, apartment rental yields range from 8.71% to 10.9%, with city average of 9.96%.
In Dolphin Coast, apartment rental yields range from 6.77% to 9.27%, with an average of 8.25%.

Economic slowdown, easing inflation

Then the economy grew by a meager 0.6% on quarter in Q2 2023, following an expansion of 0.4% in Q1 2023 and a contraction of 1.1% in Q4 2022, according to Stats SA, after power utility Eskom eased the levels of outages. On an annual basis, the country’s GDP grew by 1.6% in Q2 2023, an improvement from the prior quarter’s 0.2%.

The SA economy will likely post a meager growth of 0.4% this year, according to the South African Reserve Bank (SARB), the country’s central bank. The 2023 economic growth forecast from the International Monetary Fund (IMF) is somewhat more optimistic, at 0.9%.

“South Africa’s economy is facing mounting economic and social challenges. Growth moderated from 4.9 percent in 2021 to 2.0 percent in 2022 as the country was buffeted by Russia’s war in Ukraine, global monetary policy tightening, severe floods, and an unprecedented energy crisis,” said the IMF.

“Business and consumer confidence and investor sentiment remain weak, and the sovereign spread for South Africa remains higher than the pre-pandemic level. The average employment level in 2022 was still about 5 percent lower than in 2019, threatening social cohesion,” the IMF added.