On house prices, the future and "benoude katte"

20-04-2017

Nationally, the growth in house prices continues to be undermined by its underperforming key drivers.

For example, consider an important driver, the nominal value of residential mortgages granted, which has been shrinking (on a year-on-year basis) since the beginning of 2016.

The graph that follows shows the robust relationship between the growth in the nominal value of mortgage loans granted and the nominal growth in national house prices as measured by FNB. Evident from the graph is how the general trend in the growth of national house prices has been south since about the third quarter of 2015. Since August 2016, national house prices have even been showing low single-digit growth.

For now, strong headwinds continue to confront effective demand for mortgage loans from borrowers; not to mention mortgage-lender sentiment. These headwinds are:

• The high household debt-to-disposable income levels, which adversely affect consumers’ credit-risk profiles. The ratio between household debt and disposable income has improved in recent years, but in the fourth quarter of 2016, it was still uncomfortably high at 74%.
• Consumer confidence levels, which are in the doldrums and as a result might affect the willingness of households to make substantial financial commitments, such as buying a house.
• Inflation, which remains sticky at around 6%, while salaries and wages are not keeping up as a result of weak economic growth.
• In the fourth quarter of 2016, the official unemployment rate improved slightly but remained high at 26,5%. The graph that follows, shows the strong inverse relationship (r²=0,7) that has developed in recent years between the growth in the value of mortgages granted and the annual percentage-point change in the unemployment rate.

The recent credit-rating downgrades to junk status will of course put further pressure on the outlook for interest rates, growth in real GDP, and employment. The cumulative effect of all this cannot be good for the growth in house prices.

The holistic look – how did South Africa get here? – points to the country having entered an era of low economic growth, as this is more than just a cyclical phenomenon. And the removal of one person from a senior post is not going to be the cure either. Expect more populism (benoude katte maak benoude spronge) and social unrest.