Cash-strapped homeowners in South Africa forced to downgrade

South African homeowners are being forced to downscale amid the high interest rate environment.

The latest FNB House Price Index increased by 0.5% year-on-year in June – a slight improvement from 0.3% in May.

“The low house price growth trajectory aligns with expectations given the persistent high living and borrowing costs,” said FNB.

“Notably, lower-priced segments and non-metro regions continue to perform better. Market strength indicators suggest a potential stabilisation in supply and demand dynamics following a period of decline.”

The latest Estate Agents Survey shows a housing market weighed down by election worries and several affordability constraints.

Market activity ratings dropped to an average of 5.6 in 2Q24 – below the long-term average of 5.9.

Nevertheless, the latest reading is above the most recent lows, suggesting that a potential bottom-out occurred.

The slowdown aligns with agent expectations and highlights buyer hesitancy caused by the election uncertainty.

The survey also looks into the motivations behind property sales, with downscaling a common theme.

Downscaling due to life stages, which include moving into retirement homes, remains the most common reason in South Africa, totalling 22% of total sales.

Financial pressure-induced sales also rose slightly to 21% of total sales in Q2, aligning with the historical average and suggesting a common trend of sellers motivated by high debt-servicing costs.

Notably, the survey also shows a preference among these financially motivated sellers to downsize rather than rent, reinforcing the continued buying-down trend.

Relocation within South Africa (semigration) remained steady at 14% – still above the long-term average

Upgrading activity, on the other hand, slowed significantly to 11%, highlighting homeowners’ cautious approach in the current high-interest rate market.

Emigration-related sales also remained unchanged at 8%, shifting away from the peak seen in 2019.

Amid the downsizing trend, the affordable housing segment is offering a glimmer of hope.

The segment recorded a higher activity rating &.4) compared to the traditional market (5.0).

“Following the recent support from ultra-low interest rates, buying activity in this segment appears to be further supported by a search for less expensive properties, as elevated interest rates and stricter lending standards stretch affordability for many,” said FNB.

“Overall, the Estate Agents Survey paints a picture of a housing market in cautious mode. Affordability concerns, election anxiety, and high interest rates dampened activity and agent sentiment in Q2,” said FNB.

“However, the resilience of the affordable housing segment and pockets of regional strength offer some tentative signs of hope.”

That said, FNB is maintaining a cautiously optimistic outlook for the rest of the year, with slower price increases and the possibly of interest rate cuts supporting the bottoming out of buying activity.

“Additionally, if the new administration implements pro-growth policies, lower interest rates could further support potential buyers and lead to a revitalised housing market.”

Economists remain divided on when the South African Reserve Bank (SARB) will start cutting interest rates.

Nedbank and the Bureau for Economic Research (BER) are expecting cuts to start in September, while Investec only foresees cuts in November.

Bank of America only expects the cutting cycle to start in January, followed by cuts in March, May and July.

However, all agreed that cuts will not take place when the Monetary Policy Committee (MPC) meets later this week on Thursday, 18 July.

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