Home is where the hurt is: house prices may fall more than 14%

SA’s R5.7 trillion housing market is heading for what may be the biggest price and sales volumes drop on record. Data analysts Lightstone last week warned average house prices (in all categories) could sink by up to 14.5% by year-end.

Leafier suburbs, where properties typically trade for more than R3m, will be hardest hit, with prices potentially declining by up to 19% by Q4. That far outweighs the fall of about 5% in luxury house prices recorded during SA’s previous housing recession, in 2008/2009, and equates to a hefty R950,000 knock on a R5m property.

Lightstone analytics director Paul-Roux De Kock says these forecasts are based on a scenario that assumes a coronavirus-induced GDP contraction of 10% this year. If the economy shrinks by only 3%, overall house prices could drop by 3.9% while the luxury segment could show a fall of 6%.

According to Lightstone, properties in the R3m-plus category represent 21% (by value) of SA’s total housing stock, worth an estimated R5.7 trillion. Another 45% falls in the R1m-R3m bracket, while the rest (38%) is below R1m.

FNB economist Siphamandla Mkhwanazi expects prices to decline by a slightly more palatable 5% this year, down from positive growth of 3.5% in 2019. But he has an equally bearish view on the higher end of the market. In the R1.8m-R3.5m bracket, he has pencilled in a 10%-15% decline as a base case for the year, while suburbs with prices exceeding R3.5m could record falls of more than 20% in some cases, he says.

More worrying is Mkhwanazi’s forecast of a 45% drop in the number of houses likely to be sold this year. Since the lockdown on nonessential businesses (including the deeds office) from March 27, housing sales have virtually ground to a halt. If Mkhwanazi’s sales volume predictions materialise, total annual housing sales will drop from roughly 300,000 a year for the past 10 years to about 165,000 for 2020.

While it is difficult to predict exactly where things will end this year given uncertainty about the impact of Covid-19 on the economy, one thing seems certain: it is likely to be a far worse drop that 2008, when prices fell by no more than 1.5% on average, according to FNB.

That recession was also relatively short-lived, with prices returning to positive growth territory within 14 months.

Mkhwanazi expects a deeper contraction this time around because of the pandemic’s impact on labour markets.

Moreover, a recovery will likely be drawn out given already stretched pre-Covid-19 household balance sheets and high unemployment levels.

Though price pressure will be felt across all segments, Mkhwanazi says the higher and luxury markets will take the most pain due to an existing oversupply of stock amid dwindling demand and depressed consumer sentiment. But he suggests that sharp price falls may be averted if sellers can afford to stay put until the Covid-19 wave is over. “If there are no sales and no market, properties hold their value,” he says. He expects the affordable market below R1m to be the most resilient, with demand likely to be propped up by cheaper prices, lower transfer duties and historically low interest rates — the Reserve Bank cut the repo rate by a further 50 basis points last week, the fourth cut in 2020.

This year’s reduction of 2.75 basis points in total provides a considerable savings of about R1,700 a month on a R1m home loan (repaid over 20 years).

Demand at this end will be supplemented partly by middle-income families buying down, which is a common trend in weak economic environments.

Demand at this end will be helped partly by middle income families buying down