SA market stability expected as buyers take a new view of their primary homes

With South Africa's economic prospects for the year ahead being fairly grim, the priority for homebuyers and owners should be ensuring security of tenure for their families rather than trying to achieve superior investment returns.

And, says Gerhard Kotzé, MD of the RealNet estate agency group, the current state of the residential market in SA indicates that many local buyers are already taking this view and should continue to do so for the next 12 to 18 months.  

"We were expecting a 30 to 40% drop in demand over the past year in the face of higher inflation and the series of interest rate increases introduced by the Reserve Bank in response. But that has not materialised, and the local market has in fact remained remarkably buoyant, especially compared to those in the US, UK, Europe and Australia.

"All of these have faced the same situation as SA of rapid interest hikes as their central banks struggled to cap soaring inflation, all have experienced sharp declines in home demand and sales in recent months and some have even experienced falling home prices, although predictions of a housing market 'crash' in 2023 now seem unlikely to come true. In Australia, for example, prices have dropped by an average of more than 8% in the past nine months and are tipped to fall a further 15% in 2023, and in both the UK and US, economists expect home prices to drop by around 5 to 10%"

However, he says, the SA market appears to have been underpinned in recent months by a few distinct factors which should continue to exert a positive influence in 2023 and even 2024. "The most important of these is the growing tendency for SA homebuyers to choose their primary residence first and foremost as a place to live in safety, comfort and security, rather than as an 'investment' bought to deliver a good return.

"This view gained a lot of ground during the Covid-19 lockdowns in 2020 and 2021, which brought the value of having your own home in which to shelter, work, study and entertain into sharp focus. And it was given added impetus when the lowest interest rates in 40 years allowed many thousands of people in SA who had previously never believed they could achieve home ownership to enter the market."

Demand in SA was further driven, says Kotzé, by keen competition among the banks for new home loan business, and the fact that home price growth in SA remained muted and below inflation from 2020 to the end of 2022. "This was not the case in many developed economies, where rampant post-pandemic growth saw many buyers being priced out of the market. Annual house price growth in Australia, for example, reached more than 25% in 2021 before starting to decline, growth in the US topped 17% in July 2022 and that in the UK was still more than 26% in December.

"And now the much lower growth in SA means that large numbers of our new homeowners currently have little incentive to sell, and should in fact be more inclined to hold on to their properties as safe havens for their families, rather than try to 'cash out' and obtain new home loans at the higher rates."

The third factor in favour of the local market, he says, is that the past year's cost of living increases and corresponding interest rate hikes have been relatively low impact in SA compared to many developed countries. For example, the UK's annual inflation rate doubled from 5,5% in January 2022 to 11% in October, while the US rate shot to a 14-year high of 9% in June and is still running at more than 7%. By contrast, SA's rate only rose by around 2 percentage points, from 5,7% in January 2022 to a peak of 7,8% in June, and is now on the decline again.

"Meanwhile, central bank increases that took basic lending rates from less than 0,5% in most developed countries at the start of 2022 to between 3,5 and 4,5% by the end of the year appear to have had a proportionately much larger effect on consumers in those countries than the repo rate increase from 4% to 7% (and prime rate increase from 7,5% to 10,5%) had on South African households. Quite possibly this is because the household debt to disposable income ratio in SA is currently only around 75%, compared to 101% in the US, 148% in the UK , 211% in Australia and even higher in many European countries."

Kotzé acknowledges that while lower global oil prices are likely to bring further inflation and possible interest rate relief to SA consumers in 2023, this is likely to be negated by Eskom's recently-approved 18,65% electricity tariff increase, and potentially higher income and municipal taxes.

"Market expansion is also likely to be constrained by low economic growth (currently forecast at 1,1% for the year) and a lack of new employment creation. However, SA's economic challenges are by far not the worst in the world at the moment, and the three factors outlined above should enable most existing homeowners to ride things out for the next year or two, especially if they concentrate on reducing their debts. 

"This means that there is unlikely to be a flood of distressed properties coming back on to the market, and that SA home prices should continue to grow, albeit slowly. At the same time, lower affordability levels due to the higher interest rates and slow wage growth will continue to strengthen the rental market - and improve returns for those who do already own second and third properties as investments."