FNB expects that the housing market will benefit from the drop in inflation and, in turn, interest rates.

Stats SA latest data showed that headline inflation declined from 5.1% in June to 4.6% in July – the lowest level in three years.

FNB has thus revised its inflation outlook downward due to a strengthening in the rand exchange rate, while domestic political uncertainty has eased and global sentiment has improved.

The group now has an earlier start to the interest rate-cutting cycle, with two 25-basis-point cuts in the repo rate this year and another 25-basis-point cut in 2025. This would decrease the repo rate from 8.25% to 7.50% in 2025.

Standard Bank, Investec, Nedbank, Bank of America, and the Bureau for Economic Research (BER) expect the cutting cycle to begin next week.

FNB has also increased its GDP growth forecast to 1.0% in 2024 and 1.8% in 2025.

This is due to easing energy constraints, lower inflation, interest rate cuts, improved market sentiment, and changes in expectations over the two-pot retirement system.

“These adjustments suggest a slightly more optimistic outlook for buying activity and house price growth in the coming years,” said Siphamandla Mkhwanazi, FNB Senior Economist.

“Improved economic activity, a more benign inflation environment, and looser monetary policy could improve affordability for potential homebuyers, stimulate demand and support house price growth.”

Needs a shot in the arm

The FNB House Price Index (HPI) growth averaged 0.6% year over year in August, the same level as in July.

“Notably, the slowing trend appears to have stabilised since May and is expected to show a clearer upward trend once interest rates begin to decline,” said Mkhwanazi.

The mortgage market extension also slowed from 2.7% in June to 2.5% in July, highlighting subdued demand, house prices, and stringent lending criteria.

Deeds data shows that while loan-to-price ratios have stabilised, mortgage volumes are still declining, even at a slower pace, due to reduced demand. Weakening affordability results in lower approval rates.

The rental market, on the other hand, exhibits mixed trends. Rental inflation fell slightly from 3.3% in Q1 to 3.2% in Q2.

That said, Rode’s residential survey data indicates that flat vacancy rates have decreased, even though they remain higher than the pre-COVID level, indicating a relative surplus of rental properties.

“While high interest rates may favour renting over buying, this data suggests that this has not been sufficient to absorb the excess supply, potentially due to a sluggish labour market,” said Mkhwanazi.

“In addition, our 2Q24 Estate Agent Survey results suggest that most households that are selling due to financial pressure would rather downscale than go back into the rental market.”

“On the supply side, the volume of new-build housing stock is declining, mirroring the subdued demand. This downturn is particularly pronounced in the <80 square metre category, primarily representing affordable housing.

The housing market struggles with high interest rates and a weak job market.

However, the forecast of an improved inflationary environment and impending rate-cutting cycles offers hope of a gradual recovery.

That said, the timing of the recovery’s extended period will depend on several factors, such as the trajectory of inflation, economic growth, and global conditions.