Demand Resurfaces for Home Loans

Op-Ed by Toni Anderson, Head of Standard Bank Home Services

The South African residential property market has faced significant headwinds through the course of the year with a further slump in home loan applications. As interest rates climbed to cool off inflation, the home loans sector experienced a sharp decline, echoing the cautious sentiment of buyers and creating muted growth across the real estate landscape. However, amidst this challenging climate, our Standard Bank house view offers a glimmer of optimism – we anticipate that projected rate will lead to a more robust recovery.

Current Market Conditions: A Snapshot

Our data reveals a stark contrast between the home loan market of 2020-2021, post covid, and the present. Back in 2019, the market was registering on average R14 billion of home loans a month. This number surged to around R20 billion per month in 2021 and 2022, driven by eager first-time buyers wanting to capitalize on relatively stable housing prices and low-interest rates. Our home loan registrations significantly exceeded pre-pandemic level since the second half of 2020.

The period was marked by affordable homeownership opportunities, particularly in inland areas like Johannesburg and Pretoria, where property price growth was restrained, registering just a 3.6% increase in Gauteng for the year up to November 2022.

The situation has changed significantly. By mid-2023, the South African Reserve Bank’s interest rate hikes, intended to combat inflation, began to temper the market. This shift resulted in a significant drop in home loan applications since last year, with the market registering an average of R14 billion in home loans a month in 2023. This trend has continued into 2024 with further muted levels. This decline can be attributed to fewer application volumes as a result of affordability constraints and low consumer confidence levels. This reduced pool of buyers has consequently led to heightened competition among industry players. The contraction in buyer activity has been further corroborated by feedback from our real estate agent partners.

The Turning Tide: Standard Bank’s Forecast

Despite this downturn, Standard Bank maintains a cautiously optimistic economic outlook. Our modest 1% growth in the lending book for the first half of 2024 was in no way indicative of a shift in our risk appetite. Contrary, we maintained steady risk appetite to ensure ongoing support for aspirant homeowners, reminiscent of our stance during previous crises, such as the global financial crisis and the COVID-19 pandemic, where we continued to write more home loans when the broader industry took a cautious stance. Additionally, we made a deliberate effort to support our current homeowners throughout this period and help them stay in their homes.

Looking ahead, several factors could catalyse a revival in home loan demand:

Standard Bank forecasts the South African Reserve Bank will begin cutting the repo rate this year, with the first cut of 25 basis points expected in September and in November. Our economists expect a further two cuts in the first half of 2025. It’s not just our forecast alone, market expectations are increasingly anticipating an interest rate cut as two of the SARB’s Monetary Policy Committee’s six members voted for a 25 basis points cut even in July.

The cooling off in July 2024 inflation from 5.1% in June to 4.6% has further accelerated the argument for an immediate rate cut as it has brought inflation much closer to the SARB’s targeted midpoint of 4.5%. This imminent cut should rejuvenate buyer confidence and stimulate a rebound in loan applications.

Another reason to be optimistic is looking at the long-term trends. Historically, the residential property market has always shown resilience and recovery after significant downturns. Our political landscape stabilized quicker than many expected post-elections with the government of national unity. Coupled with our currency’s performance of late, there is potential for renewed economic stability, which may boost consumer confidence. Given the fundamentals, one can reasonably expect a rebound in our residential property market in the medium to long term.

In conclusion, while the current downturn has been challenging and might have led to a perception that banks don’t want to lend, we understand that this cycle is likely to be a transitional phase rather than a long-term trend. This is why we anticipate a reigniting of interest and activity in home loan applications.