By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
In our previous report, we outlined our expectations for the South African housing market in 2024. The basic tenet of our outlook is that the housing market cycle has likely bottomed, but that a discernible uptrend should commence in 2H24, once affordability improves. Below, we share some of the anecdotes behind this prediction and the associated risks.
Market strength indicators
Our proprietary market strength indicators are based on an extensive property valuers' database, comprising of all properties financed or valued by FNB. Valuers assess the demand and supply for property in specific areas during the valuation process. By aggregating these individual ratings, we calculate the FNB Valuers' Residential Market Strength Index (Market Strength Index) using a simple mathematical formula. These indicators have proven useful in assessing the underlying features of the market and identifying turning points.
Currently, our market strength indices show both demand and supply in negative territory. Declining demand is to be expected under the high interest rate and low consumer confidence environment. On the supply side of the equation, we suspect that the index largely reflects the decline in construction of new housing units, in response to lower demand. It is also possible that the unfavourable selling conditions, characterised by diminished affordability and tighter lending standards, are causing some homeowners to re-evaluate their decisions. Recently, however, the overall Market Strength index has trended upwards, indicating a more balanced supply-demand dynamic in the market. These conditions are often associated with rising house prices (Figure 1).
Time on market
We conduct a quarterly FNB Estate Agents survey covering a wide range of topics in the housing market, including the average time it takes to sell a property. Between 1Q22 and 3Q23, the proportion of properties that stayed on market for 90 days or longer increased from 33% to 67%. In 4Q23, however, these volumes shrank to 63%, marking the first decline since the commencement of the rate hiking cycle. While these are still elevated, the turn, assuming it is sustained, indicates a potential lift in house price growth on the horizon. Generally, there is an inverse relationship between time on market and house price growth (Figure 2).
Mortgage loan sizes
Lastly, growth in the average loan size has been trending lower since the 1H21 peak. This also coincides with the most recent peak in house price growth, which was fuelled by low interest rates. In fact, the average loan size declined by around 2% y/y in 2Q23 and 3Q23, for the first time since the Global Financial Crisis. In 4Q23, however, there was a mild recovery, which if sustained, would indicate a turning point in house prices (Figure 3).
While all these indicators suggest a bottom in the cycle, there is still a high degree of uncertainty. Risks to the inflation outlook are skewed to the upside. These range from a material deterioration in our fiscal position to an escalation in geopolitical tensions. Recent events show that biosecurity risks and adverse weather patterns cannot be ruled out either. These could de-anchor inflation expectations and cause interest rates to remain high for longer than we currently anticipate, ultimately extending prevailing market weakness.
Week in review
Total mining output expanded by 0.6% y/y in December 2023, reflecting modest growth compared to the robust 6.9% y/y (previously 6.8% y/y) expansion in November. The outturn was significantly below the Reuters consensus expectation of a 4.9% y/y increase. Monthly mining output experienced a sharp decline of 4.2% following an upwardly revised 2.7% increase in the previous month. However, the overall fourth- quarter output showed strength at 2.5%, indicating a rebound from a quarterly contraction of 0.9% during the third quarter. This suggests that the mining sector made a positive contribution to 4Q23 GDP growth, aligning with our view that the economy avoided a technical recession.
In 2023, mining output experienced a moderate decline of 0.4%, showing a significant improvement from the steep 7.2% decline in 2022. The improvement was driven by growth in coal, platinum group metals, and gold output. However, the domestic mining sector still faces challenges due to subdued external demand, low commodity prices, and domestic infrastructure constraints.
Retail sales outperformed expectations and expanded by 2.7% in December, from a decline of 1.0% in the previous month (revised from -0.9%). On a month-on-month basis, volumes increased by 1.4%, a momentum gain from the 1.1% experienced in November (revised up from 0.4%). Nevertheless, quarterly sales declined by 0.4%, implying that the retail industry will detract from 4Q23 GDP growth. The muted shopping activity in 4Q23 is consistent with sentiment indicators in consumer facing sectors, which predicted weakening demand into the 2023 festive season.
In 2023, shopping activity declined by 1.0% compared to 2022, reflecting a subdued consumer demand environment. We expect this to persist in the near term, driven by sticky inflation, high interest rates and depressed consumer confidence. Furthermore, the prevailing tight lending standards and high debt service cost environment should keep credit growth relatively contained, both in the bank and non-bank sectors, and thus provide less support to consumption. That said, the medium- to longer-term outlook is slightly brighter. Consumers should benefit from the slowing inflation trend, positive employment gains, and the extension of the Social Relief of Distress (SRD) grant. In addition, the contemplated, albeit modest, interest rate cutting cycle should help support spending on discretionary items.
Week ahead
On Tuesday, the leading indicator for December will be released. In November, the leading indicator contracted by 0.4% m/m, reversing the 0.5% m/m gain in October. Half of the constituent indicators contributed to the decline, led by the narrowing of the interest rate spread as well as the deceleration in the trend growth of job advertisement space. Overall, this reflects persistent economic weakness, which mirrors expectations at a global level.
Also on Tuesday, Stats SA will release labour market data for 4Q23 from the Quarterly Labour Force Survey (QLFS). In 3Q23, the QLFS data showed that the official unemployment rate fell slightly to 31.9% in 3Q23 from 32.6% in 2Q23, and a peak of 35.3% 4Q21. This reflected a quarterly employment increase of 398 558 (or 2.4% q/q) to 16 744 781, while the level of unemployment fell by 72 243 (or 0.9% q/q) to 7 849 131. Employment increased by 979 378 in 3Q23 compared to the same quarter last year. Despite economic growth challenges, the labour market has added 2 462 774 jobs over the past eight consecutive quarters.
On Wednesday, consumer inflation data for January will be released. Consumer inflation eased further in December, slowing to 5.1% from 5.5% in November. There was no monthly pressure as core inflation was mitigated by deflation in fuel and food and non-alcoholic beverages (NAB). Unfortunately, we expect headline inflation to lift in 1Q24, reverting to 5.5% y/y (0.3% m/m) in January. This is primarily as periodical survey outcomes provide upward pressure to core inflation and fuel price hikes become a feature. Nevertheless, the disinflation trend should continue over the course of the year, averaging around 5.2% from 6.0% in 2023.
On Wednesday, Finance Minister Enoch Godongwana will present the 2024 National Budget, a crucial event that will significantly influence the country"s fiscal path (see Economics Weekly 9 February 2024). This budget occurs amidst a pivotal election cycle, possibly the most significant since South Africa"s democratic elections in 1994. Current fiscal indicators show gross tax revenue falling short by an estimated R55 billion to R60 billion compared to projections outlined in the 2023 Budget Review. Corporate income tax revenue, in particular, has decreased by 14.2% y/y, primarily due to reduced mineral sales in the mining sector, influenced by weak global demand, low commodity prices, and challenges in port and rail infrastructure affecting mineral exports. Taxes on property are also down by 10.4%, excise duties are down by 4.1%, and taxes on international trade are down by 1.7%.
With expenditure pressures stemming from public sector wages and debt servicing costs, the fiscal deficit is expected to remain wide at around 5.0% of GDP. Additionally, significant debt redemptions and ongoing Eskom debt relief efforts will contribute to a high borrowing requirement, posing risks to debt stabilisation. Against the backdrop of weak fiscal climate and subdued growth prospects, there"s a heightened possibility that the government may tap into the accumulated funds, approximately R500 billion, in the South African Reserve Bank"s Gold and Foreign Exchange Contingency Reserve Account (GFECRA). The critical question remains the extent to which these funds will be utilised and for what purposes.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 13 Feb | SA | Mining Production % m/m | Dec | -4.2 | 2.7 |
| SA | Mining Production % y/y | Dec | 0.6 | 6.9 | |
| 14 Feb | SA | Retail Sales % m/m | Dec | 1.4 | 1.1 |
| SA | Retail Sales % y/y | Dec | 2.7 | -1.0 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 20 Feb | SA | Leading indicator | Dec | 111.8 | |
| SA | Unemployment rate | 4Q23 | 31.9 | ||
| 21 Feb | SA | CPI % m/m | Jan | 0.0 | |
| SA | CPI % y/y | Jan | 5.1 | ||
| SA | National Budget | 2024 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 73,218.44 | -0.7% | 0.3% | -7.9% |
| USD/ZAR | 18.97 | 0.1% | 0.0% | 5.3% |
| EUR/ZAR | 20.42 | 0.0% | -1.0% | 6.1% |
| GBP/ZAR | 23.87 | -0.2% | -0.4% | 10.1% |
| Platinum US$/oz | 898.77 | 1.6% | 0.4% | -1.8% |
| Gold US$/oz | 2,003.67 | -1.5% | -1.2% | 9.1% |
| Brent US$/oz | 82.94 | 1.6% | 5.9% | -2.9% |
| SA 10 year bond yield | 10.90 | 1.3% | 2.3% | 2.8% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.2 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.8 | 1.5 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.0 | 3.7 | 4.5 | 3.9 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.05 | 17.52 | 18.33 |
