By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Housing affordability: How first-time buyers are coping
First-time homeownership remains elusive for many South Africans, especially the youth. Except for a brief period in 2020/21 when interest rates were cut to record lows, youth participation, defined as mortgage acquisitions by buyers under 35 years of age, has continued to decline steadily since 2010. In this discussion, we explore the latest FNB Estate Agents Survey to understand how first-time buyers are navigating tight monetary policy.
Starting with the focal point. Headline consumer inflation recorded an average of 3.3% in 2020, the lowest since 2004, before post-lockdown supply-demand imbalances and geopolitical tensions drove inflation to 6.9% in 2022. Following a peak of 7.8% in July 2022, base-effects supported inflation as low as 4.7% in July 2023, but it has since stabilised above 5% - settling at 5.2% in April and May of this year. The impact of restrictive monetary policy has been key, limiting the lift in underlying (core) pressures which peaked at 5.3% in April 2023. Another supportive development in core inflation was that average core goods inflation was faster than services inflation. Core goods inflation reflected global developments more immediately, while firms delayed the passthrough to services. Had these measures lifted in tandem, headline inflation would have been more pronounced and interest rates more cumbersome.
The survey reveals a significant increase in the number of real estate agents who believe that incomes have not kept pace with house prices. Since the start of the interest rate hiking cycle in 2H21, the proportion of agents reporting incomes to have fallen “far behind” house prices has surged from 24.5%, to 39% in 1H24 (Figure 1). This highlights the growing disparity between what people earn and what they need to pay for housing, amid elevated debt-service costs. Consequently, mortgage volumes have fallen below pre-pandemic levels, reflecting the difficulty many South Africans face in securing financing, especially first-time buyers.
Another notable trend is the shift in how first-time buyers finance down payments. Traditionally, many relied heavily on 100%+ loan-to-value (LTV) mortgages, which allowed them to purchase homes without needing a substantial down payment. However, tighter lending standards have made these mortgages harder to obtain. The survey shows a decrease in first-time buyers using 100%+ LTV mortgages as their primary funding source, from 72% in 1H21 to 66.5% in 1H24. There is also a notable decrease in reliance on personal savings, likely due to rising living costs (Figure 2). Either way, a low proportion of first-time buyers have adequate personal savings to make a significant down payment.
To bridge the affordability gap, first-time buyers are increasingly turning to unsecured bank loans and government subsidies. According to the survey, the reliance on unsecured loans, which come with higher interest rates and shorter repayment terms, has risen sharply from 2% in 2H21 to 11.5% in 1H24. This indicates that first-time buyers are taking on more financial risk to enter the market. Government subsidies, like the First Home Finance (FHF), formerly known as the Finance Linked Individual Subsidy Program (FLISP), are also playing a more critical role. The survey shows a near doubling in the use ofFLISP as a primary source of deposit since interest rates started rising, from 3.5% in 2H21 to 6% in 1H24 (Figure 2). This highlights the importance of government programmes as an instrument to bridge social inequalities.
Decreased affordability has broader consequences. When potential buyers are priced out, housing demand slumps, impacting everything from property values to construction activity. This, in turn, can hinder job creation and economic growth. However, with slower price pressures and potential interest rate cuts on the horizon, there are signs that buying activity may have bottomed out. Combined with growth enhancing policy implementation by the new administration, lower interest rates could further support potential buyers and revitalise the housing market.
Week in review
The Absa manufacturing PMI increased to 45.7 index points in June, from 43.8 points in May, but remained in contractionary territory. Weak demand has weighed on the sector in 2Q24, outweighing the improvement in electricity supply. In addition, supplier performance has worsened, indicating that port issues remain a drag on the sector. New sales orders were sideways at 37.9 points from 37.8 points previously, while the business activity index declined further to 36.3 from 38.1 points in May. On a quarterly basis, business activity has shown limited improvement from 1Q24, suggesting a weak contribution to GDP growth by the manufacturing sector. On the positive end, purchasing prices are easing and expectations for near-term business conditions are upbeat, likely reflecting easing political uncertainty as well as an anticipated improvement in global activity as monetary policy eases.
New vehicle sales declined by another 6 531 units to record 40 072 units in June. This reflected a 14.0% y/y decrease, highlighting consumer constraints as well as weak business sentiment. Passenger car sales fell by 9.0% y/y, light commercial vehicles by 24.3% y/y, medium commercial vehicles by 27.7% y/y, and heavy trucks and busses by 11.7% y/y. Year-to-date, new vehicle sales are lower by 7.6% relative to the same period last year. As cost-of-living pressures ease, and business confidence improves following eased political uncertainty, the purchase of big-ticket items and investments should follow. Additionally, continued recovery in sectors such as tourism should support vehicle sales.
Electricity production (not seasonally adjusted) increased by 5.6% y/y in May following a 5.7% lift previously. On a seasonally adjusted basis, electricity production decreased by 0.5% m/m after lifting by 1.2% in April. Consumption increased by 4.8% y/y, from 6.2% previously, and fell by 0.6% m/m. Early indications of the 2Q24 performance suggest that the electricity sector will contribute positively to GDP growth. This will be in line with a higher Energy Availability Factor and the cessation of load-shedding for over three months.
South Africa's gross foreign exchange reserves were barely changed at $62.1 billion in June. The decline in gold reserves was outweighed by higher foreign exchange reserves (including Special Drawing Rights holdings). Overall, changes were mainly driven by valuation and asset price adjustments, which were offset by foreign exchange payments made on behalf of the government.
Week ahead
On Thursday, data on mining production for May will be released. Total mining production, not seasonally adjusted, increased slightly by 0.7% y/y in April after declining by 4.8% y/y in March. Seasonally adjusted output increased by 0.8% m/m, which was insufficient to reverse the 4.4% monthly decline in the prior month. The subdued monthly rebound, especially after the mining sector de-stocked in 1Q24, is concerning given that the country did not experience load-shedding in April. This likely reflected subdued, albeit stable, external demand and relatively weak commodity prices.
Also on Thursday, data on manufacturing production for May will be released. Total manufacturing production, not seasonally adjusted, expanded by 5.3% y/y in April after contracting by 6.5% y/y in March. Seasonally adjusted manufacturing output, which aligns with the official calculation of quarterly GDP, expanded by 5.2% m/m, more than offsetting the 2.5% monthly decline in March. This marked a good start to 2Q24 after the manufacturing sector dragged GDP growth in 1Q24. However, the PMI outcomes for May and June suggest that the performance of the sector worsened over the remainder on the quarter.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 1 Jul | SA | Absa manufacturing PMI | Jun | 45.7 | 43.8 |
| SA | NAAMSA new vehicle sales % y/y | May | -14.0 | -14.2 | |
| 4 Jul | SA | Electricity production % y/y | May | 5.6 | 5.7 |
| 5 Jul | SA | Gross foreign reserves $ bn | Jun | 62.1 | 62.1 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 11 Jul | SA | Mining production % m/m | May | -- | 0.8 |
| SA | Mining production % y/y | May | -- | 0.7 | |
| SA | Manufacturing production % m/m | May | -- | 5.2 | |
| SA | Manufacturing production % y/y | May | -- | 5.3 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 81,155.28 | 2.8% | 5.6% | 6.9% |
| USD/ZAR | 18.29 | -1.0% | -2.2% | -2.6% |
| EUR/ZAR | 19.73 | -0.1% | -3.0% | -3.2% |
| GBP/ZAR | 23.33 | -0.1% | -2.4% | -2.2% |
| Platinum US$/oz. | 1,002.45 | 1.5% | 1.5% | 9.5% |
| Gold US$/oz. | 2,356.12 | 1.2% | 1.2% | 22.9% |
| Brent US$/oz. | 87.43 | 1.2% | 12.8% | 14.1% |
| SA 10 year bond yield | 10.53 | -3.1% | -7.8% | -5.7% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022/Event | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.9 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.1 | 5.0 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.0 | 4.7 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.6 | 4.7 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 8.00 | 7.50 | 7.50 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.50 | 11.00 | 11.00 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.30 | 17.50 | 18.30 |
