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Key themes
• Global inflation looks set to remain high and above-targets for some time, while policy rates are likely to rise further as central banks seek to dampen demand to alleviate price pressures and inflation expectations. Domestically, we expect that the pace of interest rate tightening will now slow as inflation appears to have peaked and a positive real interest rate is coming into view. We pencil in a further 50bps hike at the next meeting, which will likely be the last in the current cycle, taking the peak to 7.5%. Mild interest rate cuts are now firmly in the horizon, with the first 25bps cut likely in 4Q23, and another in 1Q24. A stronger lift in interest rates now means monetary policy will have more space to support economic activity following next year’s slowdown and as inflation sustainably slows towards the preferred 4.5% anchor.
• The steeper-than-expected interest rate hikes and slower aggregate wage growth mean that housing affordability is becoming more stretched, suggesting the market will slow further in the coming months. Nevertheless, internal mortgage applications, market-wide mortgage volumes, property tax receipts and mortgage extensions data all suggest that the slowdown to date has been modest.
• Incoming data shows some positive momentum, with the labour market and GDP growth outperforming expectations in 3Q22, despite the mounting headwinds.
• Our research shows that there are four key factors that have supported market resilience: the pandemic-induced changes in consumer preferences, structurally improved affordability following a decade-long real house price correction, credit availability, and a higher household formation rate.
Annual house price growth moved lower in November
Annual growth in the FNB House Price Index was unchanged in November, at 3.2% y/y, following October’s outcome that was upwardly revised to 3.2% from 3.0%. Slower price growth appears to be broad-based, with Nelson Mandela Bay a top pick among the six major metros in South Africa. The slowing price growth trend from the post-pandemic highs reflects relatively softer demand amid higher living costs and deteriorating affordability.
Market volumes continue to soften, albeit modestly and are still above pre-pandemic levels. Similarly, internal mortgage applications, while softening, are still significantly ahead of the pre-pandemic 2019 levels. Disaggregating by income level, we note that the resilience has come from higher income brackets. Indeed, relative to the July 2020 volumes when stringent lockdown restrictions were removed, applications from those earning<R450k pa and those earning between R450k and R750k were lower by approximately 33% and 20%, respectively, in November 2022. In contrast, demand from those earning >R750k pa was only 4% lower. This was expected, as these households generally have stronger balance sheets and are less sensitive to interest rate changes. In line with this, mortgage extension remains relatively robust, with the latest data showing growth of 6.9% y/y in October, much quicker than the post-Global Financial Crisis (GFC) average of 3.8%. Nevertheless, surveyed data shows signs of a weakening market, with estate agent activity slowing towards the long-term average, and property sales due to financial pressure building up in lower priced segments.
Full report attached.
Regards,
FNB Eonomics Team