The FNB house price index moved sideways in May, recording a 3.3% year on year increase from 3.4% in April.

“In real terms, average house prices continued declining, which we read as a continuation of a downward adjustment in line with subdued economic activity and lower disposable income levels,” says FNB economist, Siphamandla Mkhwanazi.

“The first quarter 2019 home transactions data shows that growth in house prices is skewed towards lower value bands, while higher value bands are under relative pressure. This is largely reflective of supply-demand imbalances across price segments – excess demand in the lower end and excess supply in the higher end.

“While the uncertainty associated with elections has somewhat lifted, paving a way for improved sentiment, it may take a while longer before that filters through to real economic activity. For the residential property market, excess supply in the higher end segments must clear before we see an overall house price acceleration. Pent up demand will likely green-shoot in the more “sentiment sensitive” sub-segments such as holiday home buying and investment property purchases.”

From a supply-side perspective, he says the proportion of new flats and townhouses – as a percentage of total new housing units – is trending significantly above its long-term average of around 30%. Year to date, these units have accounted for about 60% of new stock, up from 29% in 2015 and 13% in 2000. This could be explained by the increasingly urbanising population, rising densification in the metros, as well as the changing consumer preferences. For example, buyers are now more security conscious in their buying decisions.

“Looking ahead, improvement in sentiment combined with an interest rate cut, which we expect in the next MPC meeting in July, will somewhat support demand for mortgages and thus purchasing activity, albeit with a time lag.

“These will be countered by rising household income pressures, the lack of willingness to commit to substantial financial obligations by consumers, as well as supply-side factors such as lenders’ lending standards. In all, we expect house prices to average around the 3.5% mark, versus our inflation projection of 4.6% this year,” says Mkhwanazi.