FNB spells out bad news for property in South Africa

 ·11 May 2024

FNB has revised its interest rate and GDP expectations downwards, resulting in a delayed housing market recovery in South Africa as tough times continue.

According to FNB senior economist Siphamandla Mkhwanazi, recent data suggests that economic activity in the US remains stronger and inflation stickier, relative to our earlier expectations.

He said the Federal Reserve has conveyed that it intends to maintain high interest rates until inflation is brought down to its target level.

As a result, FNB now anticipates that the US Fed funds rate will persist at a higher level for a more extended period, with the first cut being postponed from June to September.

The cutting cycle is also expected to be less aggressive in the near term than planned, with 75 basis points of cuts expected over the next year instead of the previously estimated 125 basis points.

In our local context, the South African Reserve Bank (SARB) strongly intends to shift the inflation objective from the current 4.5% soft target to 3%.

However, Mkhwanazi said the exact timing of the official adoption of this target is unclear.

Therefore, it is possible that interest rates may have to remain restrictive for a longer period of time in order to align policy with this lower target and manage inflation accordingly.

To account for these developments, FNB’s repo rate forecast has been adjusted to show a delayed and shallower cutting cycle.

“We have pushed out the first cut from July to November this year, with rates reaching 7.5% by the end of next year versus 7.0% previously,” said Mkhwanazi.

“Importantly, however, there is a downside risk to the repo rate over the medium-to-longer term as lower borrowing costs would be supported by SA being more competitive in capital markets,” he added.

“In addition, less exchange rate depreciation would support slower and more stable inflation, entrenching its fall towards 3% and reinforcing the path to structurally lower interest rates.

“So far, we see inflation averaging 5.2% this year and drifting lower to 4.7% and 4.5% in 2025 and 2026, respectively,” said Mkhwanazi.

Mkhwanazi noted that, given our updated interest rates view and weaker-than-expected economic activity during the first quarter, GDP growth projections have been tweaked slightly lower (by 0.1ppt) throughout the forecast horizon.

“We now expect growth to average 1.2% this year (1.3% previously) before lifting to 1.5% and 1.6% in 2025 and 2026, respectively,” he said.

According to FNB, this means the housing market recovery will be slightly delayed, and its growth trajectory will be slightly lower than previously expected.

Read: What first-time homebuyers can afford in Cape Town, Joburg and Durban

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