Warning for property owners in South Africa – brace for a rough year ahead: experts

 ·8 Feb 2023

Property analytics group Lightstone has published its House Price Inflation (HPI) forecast for South Africa’s residential property market in 2023, setting low expectations for growth – and a warning that further interest rate hikes are on the way.

According to Lightstone, the South African residential property market will be shaped by local and global challenges in 2023, but homeowners and other stakeholders will mostly feel the pain of the country’s stagnating economy, seeing prices grow at a rate lower than inflation.

Paul-Roux de Kock, Chief Analytics Officer at Lightstone, said the group’s three scenarios suggest HPI in South Africa would likely come in between 0.9% and 3.7%, depending on the broader economic scenario.

Adding to property owners’ woes, with no end in sight for South Africa’s electricity crisis and increasing water outages, the South African Reserve Bank (SARB) recently increased interest rates by 25 basis points and adjusted its GDP growth forecast to just 0.3% for 2023, down from its previous estimate in November of 0.6%. The bank expects growth for 2022 to come in at 2.5%.

The Consumer Price Index (CPI) and core inflation have significantly diverged over the past 18 months, with CPI ending 2022 at 7.2% and core inflation – which excludes the impact of the volatile fuel price driven by Russia’s war with Ukraine – ending at 4.9%.

For Lightstone’s forecasts, the more predictable core inflation rate has been used, de Kock said. However, under all scenarios, the group sees even more interest rate hikes coming – ranging from 50 basis points to a massive 200 basis points (175bp after the January hike).

Variable Low Mid High
Current CPI 3.0% 4.0% 5.5%
Current Prime Interest Rate 50bp 100bp 200bp*
GDP Growth 0.0% 0.3% 1.1%
* Before the January interest rate hike

The consensus among economists is that South Africa is likely to see at least one more interest rate hike for the year, with the most pessimistic view being that it will be a 50 basis point hike in March 2023.

Surveys conducted by Finder and Bloomberg point to a general acceptance that interest rates are near their peak, and prime lending rates are expected to hold at between 11.00% and 11.25% until the end of the year, with some economists even seeing a possible rate cut by the end of the year.

Dr Francois Stofberg of Efficient Wealth said he is confident that the country has reached the end of the rate-hiking cycle in South Africa and that there is, most likely, only one more hike left.

“The next hike will probably be 0.25% or 0.50% and should be announced in the upcoming months. Our view is also that South Africans can expect to see the first rate cut early in 2024,” he said.

Mid-HPI scenario – 2.3%

In Lightstone’s mid-scenario, however, with the baseline GDP growth expectation of 0.3% in 2023, it expects the SARB to take a moderate approach in interest rate hikes, with interest rates rising slowly by a total of 100 basis points for the year.

“We expect core inflation to drop to 4% in such a scenario, and HPI is forecasted to continue the slow decline we’ve seen for more than a year and end 2023 at 2.3%,” the group said.

High-HPI scenario – 3.7%

Under a scenario where the economy sufficiently recovers to support GDP growth of 1.1%, Lightstone expects core inflation to climb to 5.5%, with interest rates increasing by 200 basis points.

“Under such a scenario, we forecast HPI to bounce back in the second quarter and end 2023 at 3.7% with strong upward momentum going into 2024.”

Low HPI scenario – 0.9%

If the economy stagnates at 0% GDP growth and core inflation drops to 3%, De Kock said South Africa might experience an accelerated decline in HPI, ending the year at 0.9% with a negative trajectory for 2024.

Under such a scenario, the SARB might stop the upward interest rate cycle sooner – only increasing it by 50 basis points for the year – offering some consolation to homeowners with outstanding debt.

Mid-value market segment to weather economic storms best

According to Lightstone, the mid-value market segment should be more resilient than other segments in all the presented scenarios, as this segment will gain from the more active informal economy as well as activity from buyers out of the higher-value segments wanting to downscale.

“We expect HPI in this market segment to only drop to 1.2% in our low HPI scenario and it has the potential to reach 4.2% HPI in our high HPI scenario,” de Kock said.

Higher value outstanding mortgages in sections of the Luxury market segment have seen this segment more negatively affected by the upward interest rate cycle, and Lightstone expects this to continue under the Mid- and Low-HPI scenarios.

“In our High HPI scenario, we expect HPI in this market to start recovering sooner than the lower value market segments, but coming off a low base, we see limited upside potential in 2023”, said De Kock.

During the course of 2022, the Freehold and Sectional Scheme HPI have converged around the national average. De Kock said Lightstone expected this trend to continue with Sectional Schemes being slightly more resilient in the Low and Mid-HPI scenarios.

Read: Good news for Cape Town property owners

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