FNB's Residential Property Barometer for October 2021

In summary:

Key themes

• Market strength indicators show that demand is moderating, but still above 2019 levels.
• Despite slowing volumes growth, the value of mortgage extension continues to trend higher, supported by demand for bigger loans, reflecting a shift towards higher price brackets (or bigger properties).
• Our estimated loan-to-price ratio (proxy for loan-to-value, at origination) trended lower in 3Q21. This implies that buyers forked out slightly bigger upfront deposits relative to the 2020 average, but still smaller compared to 2019.
• The slow recovery in the labour marker, combined with higher 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 this impact.

Annual house price growth lower in October

The slowing trend in house price growth continued in October, with the FNB House Price Index decelerating to 3.0% y/y for October, from 3.2% in September (revised up from 3.0%). The slowing pace of price growth is consistent with the waning interest rate induced demand and a lagged recovery in labour markets. Our market strength indicators show a widening demand gap: the demand index has started signalling a marginal decline in the year-on-year growth, while the supply index continues to recover.

Loan-to-price ratio trending lower

In our earlier reports, we showed that loan-to-price ratio1 (LTPs) climbed throughout the pandemic, to the highest levels since 2008. This increase was more pronounced in higher purchase prices (top 40% of the market). Recent data shows a reversal of that trend, with average LTP falling to 92.1% in 3Q21, from a peak of 93.1% in 4Q20 (Figure 3). In our view, this reversal is partly because market volumes are migrating away from younger buyers (<35 years old), towards middle-aged (35-55 years old) and, to a lesser extent, older age groups (+55 years old). These buyers tend have stronger balance sheets (equity) and access to savings to fund upfront deposits. In addition, Figure 5 shows that the tightening is in higher purchase prices, suggesting that lenders are reducing their exposure in the higher-priced segments, where most of the activity is currently concentrated. Nevertheless, the LTP ratio remain above the post-global financial crisis average of 89.9%.

Full report attached.