By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Despite attractive exchange rates, foreign participation has been relatively muted in recent years, largely due to declining sentiment towards South Africa (SA). However, the recent formation of the Government of National Unity (GNU) has led to a surge in optimism. Could this positive sentiment, combined with favourable exchange rates, attract foreign buyers and expatriates back to the domestic market? This report provides an update on the level of foreign participation in the domestic market, using findings from the FNB Estate Agents Survey.
Background
In the survey we compiled data on primary reasons behind property transactions, including emigration. We term this "outbound supply." Additionally, we gauged property acquisitions by foreign nationals and South African expatriates, revealing the "inbound demand." Finally, we contrasted these dynamics, to gain insights into the directional effect of migration on the market. We define this as the net foreign demand which denotes the divergence between inbound demand and outbound supply. A negative value for net foreign demand indicates that migration contributes to an excess supply of homes available for sale, thereby collectively exerting downward pressure on prices.
Outbound supply: Emigration-linked sales
Emigration-triggered property transactions have markedly decelerated, plummeting from a peak of approximately 18% in 2019 to an average of 8% of overall domestic sales in 2Q24 (Figure 1). In fact, semigration, denoting property dispositions by individuals moving across regions within the country, has emerged as a more prominent trend, accounting for 14% of transactions in the same period. Nevertheless, emigration-related sales remain significant in higher priced segments.
Inbound demand: Participation of foreign nationals and expatriates in the domestic market
Purchases by foreigners have been relatively muted in recent times. However, data suggests a mild uptick over the past year or so. In 2Q24, these transactions were estimated at 4% of total volumes, a percentage point higher than a year ago, and now largely consistent with the long-term average of 4.2% since 2Q04. Still, they remain below the peak of around 6% recorded in 3Q16. The other aspect pertaining to "inbound demand" involves purchases by South African expatriates. Here, our survey enquires about the volume of expats buying homes locally for investment purposes or upon their return to the country. After reaching approximately 3% in 4Q23, expatriate acquisitions have moderated to 2% by 2Q24. While the significance of expat activity has somewhat recovered from the 2018 lows, when these transactions accounted for just 0.5% of the market, it has remained stable around the long-term average of 2.1% (Figure 2).
Bringing it all together: Net foreign demand
For 2Q24, our estimates indicate that net foreign demand stood at approximately -2% of domestic volumes, an improvement from -4% a year ago (Figure 3). This underscores the demand deficit generated by migration, necessitating local buyers to bridge the gap to maintain equilibrium between supply and demand. While net foreign demand remains negative, the recent improvement in sentiment and favourable exchange rates suggest that foreign participation in the South African property market may increase. If this trend continues, it could contribute to a more balanced market and potentially support house price growth.
Week in review
The leading business cycle indicator fell slightly to 111.4 index points in June, from 111.9 in May. This translated to a 0.4% m/m decrease, but the indicator was 1.6% higher than a year ago. Therefore, economic conditions remain improved when compared to 2023, even as the momentum of the improvement slows. Five out of the seven available constituent variables decreased, with the largest negative contributions from a decline in residential building plans approved and a narrower interest rate spread. We could see an improvement in the momentum when confidence and activity outcomes are buoyed by stable energy supply, easing political uncertainty, slower inflation, and lower interest rates.
Headline consumer inflation slowed to 4.6% y/y in July, down from 5.1% in June, despite monthly pressure of 0.4%. Core inflation eased to 4.3% y/y, from 4.5% previously, but also reflected monthly pressure of 0.3% from utility services. Electricity price inflation was 11.0% m/m and 12.1% y/y. Average fuel prices fell by 3.6% m/m but were up by 4.5% y/y, down from 7.6% previously. Food and non-alcoholic beverages inflation continued easing to 4.5% y/y from 4.6% previously. Slowing global inflation, stable oil prices, a less depreciated rand, and subdued domestic demand remain supportive to lower inflation this year. We anticipate that inflation will fall below the 4.5% target over the next few quarters but lift at the turn of next year as base effects become less favourable. Nevertheless, this trend should be supportive of headline inflation averaging below 5.0% this year and potentially below 4.5% next year. The risk, however, is that geopolitical tensions flare up, lifting the risk premium on commodity prices and keeping logistical costs elevated.
Week ahead
On Thursday, data on producer inflation for July will be released. In June, producer inflation was steady at 4.6% y/y, unchanged from May's print. Monthly pressure was -0.3% after averaging 0.5% in the first five months of the year. Excluding petroleum-related products, producer inflation increased slightly to 4.0% y/y (0.2% m/m) from 3.9% y/y (0.1% m/m) in May. Intermediate producer inflation rose to 2.3% from 0.4%, with monthly pressure steady at 0.6% between May and June. We expect a continued moderation in producer inflation to around 4.3% y/y, with monthly pressure at -0.1%, premised on an average fuel price decline, supported by a less depreciated rand and stable oil prices.
On Friday, Private Sector Credit Extension (PSCE) data for July will be released. PSCE surpassed expectations and accelerated to 4.3% y/y in June, up from 3.9% in May. The improvement was driven by corporate credit, which expanded by 5.1% from 4.3% previously. By contrast, household credit growth slowed marginally to 3.3%, from 3.4% in May, the weakest pace since March 2021. Year-to-date, PSCE growth averaged 3.7%, half the rate of 7.4% over the same period in 2023, reflecting the impact of high borrowing costs and tighter lending standards.
Also on Friday, the trade balance for July will be published. The trade balance recorded a surplus of R24.2 billion in June, up from a downwardly revised R20.0 billion (previously R20.1 billion) in May. This improvement occurred despite a 3.4% monthly decline in exports to R172.0 billion, as a significant 13.6% monthly decline in imports maintained the surplus. Year-to-date (January to June), the decline in imports has been broad-based across major merchandise categories despite a less depreciated rand, reflecting subdued domestic demand.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 20 Aug | SA | Leading economic indicator | Jun | 111.4 | 111.9 |
| 21 Aug | SA | CPI % m/m | Jun | 0.4 | 0.1 |
| SA | CPI % y/y | Jul | 4.6 | 5.1 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 29 Aug | SA | PPI % m/m | Jun | -- | -0.3 |
| SA | PPI % y/y | July | -- | 4.6 | |
| 30 Aug | SA | Private Sector Credit Extension % y/y | July | -- | 4.3 |
| SA | Trade Balance R billion | July | -- | 24.2 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 83,620.81 | 1.7% | 3.6% | 14.1% |
| USD/ZAR | 18.02 | 0.0% | -2.0% | -4.2% |
| EUR/ZAR | 20.01 | 1.2% | 0.2% | -1.9% |
| GBP/ZAR | 23.58 | 1.9% | -0.7% | -1.4% |
| Platinum US$/oz. | 949.18 | -0.7% | 0.1% | 2.6% |
| Gold US$/oz. | 2,484.75 | 1.1% | 3.1% | 30.9% |
| Brent US$/oz. | 77.22 | -4.7% | -4.7% | -8.1% |
| SA 10 year bond yield | 9.91 | -0.4% | -2.9% | -11.9% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 5.0 | 1.9 | 0.7 | 0.9 | 1.7 | 1.8 |
| Household consumption expenditure % y/y | 6.2 | 2.5 | 0.7 | 0.8 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | -0.4 | 4.8 | 3.9 | 1.2 | 4.8 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 4.9 | 4.4 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.5 | 4.4 | 4.6 |
| 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 | 18.40 | 17.60 | 18.30 |
