By Siphamandla Mkhwanazi
The FNB House Price Index (HPI) slowed further in June, with annual house price growth easing to 5.2% year-on-year (y/y) from 5.7% y/y in May (Figure 1). On a month-on-month (m/m) basis, prices were unchanged, reinforcing signs that the residential property market is losing momentum after a relatively robust start to the year. The latest data implies that average house price growth moderated to 5.6% y/y in 2Q26, down from 6.0% in the first quarter. While house price inflation remains modestly ahead of headline consumer inflation, which measured 5.0% y/y in June, the gap has narrowed considerably compared to earlier in the year.
The moderation in price growth reflects a more challenging operating environment for households. Higher borrowing costs, weaker consumer confidence and softer economic conditions are weighing on housing demand and are likely to restrain market activity through the remainder of the year. Consequently, we expect annual house price growth to slow further towards the 4% mark by year end.
Importantly, however, the housing market continues to benefit from supply-side constraints that are helping to cushion prices. New residential development activity remains subdued, while the supply of existing homes available for sale has also declined, as reflected in our Market Strength Indices (Figure 2) and recent new-building statistics from Stats SA. This limited stock availability is preventing a more pronounced correction in house prices and should continue to provide support to valuations over the near term. As a result, while weaker macroeconomic conditions are likely to suppress transaction activity, we do not expect a broad-based decline in house prices.
Rental market firmer despite softer economy
The rental market continues to strengthen gradually, supported by affordability constraints in the ownership market and steady household formation. According to the latest data, rental prices rose by 4.1% y/y in June and have continued to trend gradually higher alongside declining vacancy rates (Figure 3).
Regionally, the Western Cape remains the standout performer, benefitting from sustained in-migration, particularly among higher-income households, limited housing supply and tight rental market conditions. Gauteng continues to see stable rental demand, although greater housing supply is keeping rental growth more contained. KwaZulu-Natal is also experiencing improving rental fundamentals, supported by ongoing urbanisation and household growth (Figure 4).
Outlook
We expect house price growth to continue moderating towards 4% by year-end as elevated borrowing costs, weaker confidence and slower economic growth weigh on housing demand. However, declining levels of new residential development and fewer homes available for sale should continue to provide support to prices. Consequently, while transaction activity is likely to soften further, we do not expect a broad-based decline in house prices.
The South African Reserve Bank's (SARB's) decision to leave interest rates unchanged was a welcome surprise, providing some relief to households and prospective buyers. Looking ahead, we expect inflationary pressures to peak in early 2027, creating scope for the SARB to resume its easing cycle. Lower borrowing costs should support mortgage demand, improve affordability and help stabilise housing market activity.
Rental market conditions are also expected to remain relatively firm. Affordability pressures and tighter lending conditions should continue to support demand for rental accommodation, while a constrained development pipeline limits growth in rental stock. However, vacancy rates remain slightly above pre-pandemic levels, suggesting that excess capacity has not yet been fully absorbed. While landlords have regained some pricing power, there appears to be a natural limit to the extent to which rents can rise before affordability becomes a binding constraint. Consequently, rental inflation is likely close to its cyclical peak and should increasingly move in line with broader consumer inflation trends over the medium term.
ADDENDUM - NOTES:
Note on The FNB House Price Index:
The FNB Repeat Sales House Price Index has been one of our repertoire of national house price indices for some years, and is based on the well-known Case-Shiller methodology which is used to compile the Standard & Poor's Case-Shiller Home Price Indices in the United States.
This "repeat sales approach" is based on measuring the rate of change in the prices of individual houses between 2 points in time, based on when the individual homes are transacted. This means that each house price in any month's sample is compared with its own previous transaction value. The various price inflation rates of individual homes are then utilized to compile the average price inflation rate of the index over time.
The index is compiled from FNB's own valuations database, thus based on the residential properties financed by FNB.
We apply certain "filters" and cut-offs to eliminate "outliers" in the data. They main ones are as follows:
Note on the FNB Valuers' Market Strength Index:
When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple "good (100)", "average (50)", and "weak (0)". From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers' Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal.
