The South African housing market has seen a period of strong growth over the past two years, with low interest rates and a strong demand for property driving sales and pushing up house prices. However, this boom is beginning to cool off as interest rates rise and the cost of living continues to increase.

Despite this, the market is not expected to crash, with sales still predicted to remain strong in 2022, but with a slower growth rate in 2023.

The pandemic has created a bright spot in the economy with many first-time buyers entering the market, and existing homeowners upgrading to larger homes.

The value of property sales has more than doubled in the past year, reaching R153 billion in 2021, but this growth is predicted to slow in the coming year due to the aforementioned reasons.

Correlation Between House Prices and Interest Rates

Recent data from Lightstone shows a decline in the number of residential property transfers registered in the deeds office in 2022.

Despite this, the total value of property sales has continued to rise. This trend has been attributed to the recent rise in interest rates, which has made borrowing more expensive and impacted home buying patterns. Industry experts argue that this is not a sign of a crashing market, but rather a correction in response to the interest rate increases.

Since July 2022, interest rates have risen by 3.5%, taking the prime lending rate from a near 50-year low of 7% to 10.5%. This, combined with higher living costs, has affected consumer affordability, and led to a decrease in demand for properties.

Experts predict that this trend will continue in 2023, with a predicted 10% decline in the number of properties transferred. However, it is important to note that house prices across South Africa are still increasing, although at a slower rate.

Despite the economic challenges, experts predict that the housing market in South Africa will remain resilient in 2023. FNB predicts an average growth in house prices of 3.5% for 2022 and 3.4% for 2023.

RE/MAX's Goslett is even more optimistic, forecasting a growth rate of roughly 4% for 2023. This may appear to be counterintuitive given the ongoing economic weakness, high unemployment, and potential for further interest rate increases.

However, FNB's Mkhwanazi argues that the housing market will remain healthy because banks are still extending mortgages at attractive terms, which will support home buying patterns.

The mortgage market is highly competitive, and banks are eager to grow their market share by extending home loans. This is supported by data from mortgage originator ooba, which shows that the extension of mortgage loans to consumers grew by 7.1% in August 2022 compared to the previous year.

Despite the recent interest rate hikes and increased cost of living, commercial banks in South Africa are still offering home loans at attractive interest rate concessions, with an average prime lending rate minus 0.3% in the third quarter of 2022. This is a significant change from pre-pandemic, when banks typically offered home loans with an interest rate of prime plus 2%. Additionally, commercial banks are now demanding smaller upfront cash deposits on home loans.

According to Samuel Seeff, chair of Seeff Property Group, consumers in the affordable and middle-priced housing market, with homes typically valued below R3 million, are expected to be the most affected by interest rate increases, which will impact their affordability and home-buying activity. This trend is already evident, as mortgage applications by first-time buyers, typically purchasing affordable homes, are now below 50% compared to 60% in mid-2020.

However, Seeff predicts stronger sales in properties valued above R3 million, as buyers in this segment are less sensitive to rate hikes. The interest rate increases, combined with higher living costs, have had an impact on consumer affordability levels and led to a decrease in demand for properties.