FNB predicts ‘W-shape’ recovery for residential property sector

The residential property sector’s buying activity is resurging. This is according to FNB’s latest residential property barometer for August 2020.

It reports that annual house price growth rebounded to 1.4%
year-on-year in July, down from an upwardly revised 0.7% in June and 0.6% in
May.

However, April and May’s house price indices are based on significantly lower volumes of mortgage transactions which affected the stability of the price index. Volumes have since normalised and the index has stabilised.

The bounce back in prices reflects the unexpectedly rapid recovery in market activity since the easing of lockdown restrictions” comments FNB economist, Siphamandla Mkhwanazi.

Dr Andrew Golding, chief executive of the Pam Golding Property group says it is evident that the property industry has come out of the gates very strongly after the restart of the residential real estate activities at the beginning of June and during July 2020. This activity is driven by realistic pricing expectations and motivated sellers.

“In the residential property market, we are currently seeing
the main price bands experiencing the most interest and activity, firstly those
up to R2.5 million and R3 million, as well as the middle market price band
between R3 million and R8 million, and upwards.”

Our initial expectations were for the pandemic to have a
more chilling and lingering impact on activity with pent-up demand filtering
through only later this year. In contrast, the volume of new mortgage
applications has rebounded beyond the pre-lockdown levels and across the price
spectrum. This is also supported by the volume of buyer leads derived from web
traffic to property portals which have risen above expectations”
says
Mkhwanazi.

FNB’s Market Strength Index is compiled from a property valuers’ database suggesting that supply remains stronger than demand, but the gap has started narrowing from the recent weakest (lockdown-induced) level in May.

The data also highlights that demand collapsed during Level
5 of lockdown but gradually recovered as restrictions eased. The pace of supply
appears to have spiked around April but swiftly retreated thereafter.
Currently, the overall level of supply rating appears to be moving sideways.

A retreat in supply came from higher price categories
presumed as sellers reassess their decisions amid the challenging macroeconomic
environment. Homeowners looking for bargains and weighing selling versus
refinancing appears to be supporting these prices.

There has been a number of high value sales made across
the luxury areas from Sandton to Zimbali and the Atlantic Seaboard with two
sales above R40 million in Plettenberg Bay. The expectation of wholesale price
declines has not materialized. Largely as prices have been in decline since
2017 and this has left sellers with little room to negotiate although there are
always exceptions
”, says Samuel Seeff, chairman of the Seeff Property
Group. “Buyers looking for ‘bargains’ in the market may therefore be left disappointed”.

Mkhwanazi comments: “It is important to note that this rating, market strength is still 15% above the lowest rating during the Global Financial Crisis in June 2009. The pandemic does not appear to have had as much of a chilling effect as we might have feared, at least at this stage

In fact, results from FNB’s Estate Agents Survey showed that
while overall activity plummeted in the second quarter of 2020, the pandemic
had not yet led to exceptional market discounts. The average discount was estimated
at 12% in the second quarter, relatively unchanged from 13% in the first
quarter of 2020.

FNB believes the rebound in activity reflects numerous
factors; firstly, pent-up demand from the lockdown period where buying
decisions were taken before the commencement of the lockdown with some of these
delayed purchases on the back of the significantly lower transfer duties
announced in February’s Budget.

Secondly, the record low mortgage rates incentivise renters
to buy and first-time buyers to front load their purchasing decisions as
monthly mortgage payments have come down i.e. sales that would have taken place
are happening now with some buyers looking into fixed mortgage rates while they
are at a record low.

Lastly, there are infant signs of behavioural shifts as homeowners reassess their housing needs and preferences due to life in lockdown. Informal evidence cites the rising demand for bigger properties in less crowded ‘second-tier’ cities.

Looking ahead, the historically low interest rates and lower
transfer duties (particularly in the middle-priced segment) will continue to
support activity and house prices in the near term.

However, FNB notes that there is still a great deal of uncertainty around the lasting impact of Covid-19. “Our expectation of a significant weakening in labour market conditions implies a greater downward pressure on house prices in the medium term” says Mkhwanazi. “While a ‘V-shape’ recovery is apparent in the data, labour market tailwinds could have a more chilling effect ahead, leading to another drop in activity and a likely ‘W-shape’ recovery. In our view, the current pent-up demand will likely not be sustained, and it is unlikely to replace the demand lost due to very weak labour market outcomes” he concludes.

Source: Propertywheel.co.za | https://propertywheel.co.za/2020/08/fnb-predicts-w-shape-recovery-for-residential-property-sector/

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