FNB's Residential Property Barometer for December

Market strength indicators show that growth in demand has moderated, but market volumes are still running above pre-pandemic levels. Deeds data, supported by internal applications volumes, shows that mortgage approvals in the first nine months of 2021 were approximately 34% higher compared to the same period in 2019. The resurgence in market volumes was more pronounced in the affordable segments, following a more severe decline in 2020 due to the harsher impact of the pandemic on lower income households. Indeed, lower income buyers tend to be more sensitive to economic shocks. Furthermore, prior to the pandemic, the more "affordable" segments were experiencing a faster-paced growth in demand compared to all the other price segments. Thus, the surge also reflects the continuation of that trend, and would have been fuelled by ultra-low interest rates.

Despite slowing volumes growth, the value of mortgage extension continues to trend higher. This reflects a shift towards higher price brackets (or bigger properties). By November 2021, the value of outstanding mortgage advances was 7.3% higher compared to the same period in 2020, and 11% compared to 2019. Deeds data, once again supported by internal applications volumes, shows that the average mortgage size approved in the first nine months of 2021 was approximately 16% and 13% higher compared to the same period in 2019 and 2020 respectively.

Our estimated market-wide loan-to-price (LTP) ratio (proxy for loan-to-value, at origination) is trending lower: buyers now need to fork out slightly bigger upfront deposits relative to the 2020 average, but still smaller compared to 2019. The value of an approved (and taken up) mortgage relative to the purchase price was 92.1% in 3Q21, backtracking from a peak of 93.1% in 4Q20 (Figure 5). At the same time, market volumes are migrating away from younger buyers (<35 years old), towards middle-aged (35-55 years old) and, to a lesser extent, older aged groups (+55 years old). These buyers tend have stronger balance sheets (equity) and access to savings to fund upfront deposits. Nevertheless, the LTP ratio remains above the post-global financial crisis average of 89.9%.

Interest rates are set to increase by at least 75bps this year, on the back of rising inflationary pressures and the less accommodative global monetary policy conditions. While this may have a cooling effect on market volumes (and eventually price growth), it is important to distinguish that the current wave of buying activity is predominantly driven by buyers who are less sensitive to interest hikes, as noted above.

The slow recovery in the labour marker, combined with rising interest rates suggests a less supportive medium-term environment for home buying activity. However, if sustained, the ongoing shifts in housing needs, which has lent support to homeownership, could mitigate the impact.

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