Spokesperson: Siphamandla Mkhwanazi, FNB Senior Economist
KEY THEMES
- Following the steeper-than-expected 50bps hike in March, the repo rate is likely to have peaked at 7.75% and should remain at this level for some time, with mild cuts only coming into view in 4Q24.
- Market strength indicators show waning housing market resilience, in line with stretched household budgets and souring buyer sentiment.
- House price growth is expected to slow to around 2% this year from 3.5% in 2022. Price growth is expected to start lifting in 2H24 as interest rate pressures ease and marginal buyers return to the market.
The FNB House Price Index’s annual growth decreased in March, averaging 2.1% year-on-year, down from 2.3% in February. This represents the lowest home price growth since July 2020, and takes average growth to 2.4% y/y in 1Q23, down from 3.1% in 4Q22. These outcomes are in line with our expectations, and commensurate with consumer-related data which continues to show weakening household fundamentals as the elevated cost of living and rising interest rates take hold.
The latest SARB’s Quarterly Bulletin data revealed that while household income continued to find support from non-labour income (approximately 30% of household disposable income), labour market fragilities are apparent (Figure 2). Real compensation of employees (or labour income, 70% of household income) declined across virtually all sectors in 2022, and continue to fall below pre-pandemic levels, as wages lag behind inflation. Furthermore, households are now steadily shifting away from asset-backed credit and toward unsecured credit. In addition, households are now increasing their uptake of non-bank credit, which is generally pricier, but arguably easier to access. Overall, the increased reliance on unsecured credit in part reflects households’ investment into alternative energy sources. However, it also likely reflects distressed borrowing by households with more constrained budgets. These trends amplify risks of credit defaults, particularly in the non-bank sector and among lower income segments.
The move away from asset accumulation is weighing on household wealth levels. Household net worth, defined as the value of household assets minus outstanding liabilities and used as a proxy for household balance sheet strength, is receding. In addition, household savings, accumulated during lockdown, have now been depleted. This implies that households are left with limited buffers to weather the economic downturn, and thus a less supportive home buying environment. Positively though, overall household indebtedness remains relatively contained by historical standards. This, in conjunction with still strong non-labour income growth implies that there may still be pockets (likely few higher income households) with capacity to take on big-ticket purchases. However, it could also mean that the distribution of risks across income groups is highly uneven. Indeed, our FNB Estate Agents Survey results indicated that incidents of downscaling are more prevalent in lower-priced segments (see our report here).
As such, we maintain our view of slower house price growth of around 2% this year. The price growth trend is expected to start lifting in 2H24 as interest rate pressures ease, and marginal buyers return to the market (see our outlook here).
