Lightstone suggests the best-case scenario will see house-price growth falling to -3.9%, but in the worst
House prices are going to plummet this year, but just how far they will fall depends on the country’s economic growth. Best-case scenario predictions from Lightstone are that house-price growth will drop to -3.9%, with the worse-case outlook seeing price inflation decline to -14.5%.
The middle scenario is that house- price growth will decrease to -8.8%. The market ended 2019 with inflation at under 2% and, even before the Covid-19 crisis hit, Lightstone estimated that 2020 growth would drop below the 0% barrier for the first time since the 2008 economic recession.
With the added pressure imposed by the Covid-19 pandemic, however, the company has released three scenarios and provided a view on how those economic scenarios might play out in the residential property market.
The three scenarios Lightstone released are part of a range of possibilities that data scientists have run through forecast models to assist clients to make sense of the residential property market in a post-lockdown economy, says analytics director Paul- Roux de Kock.
“With very little or no certainty on how this black swan event will ultimately play out, Lightstone decided to model three scenarios based on the GDP dropping between 3% and 10%.”
FNB estimates that the country’s GDP could contract by between 7% and 10%.
Scenario 1: Generic recessions
Based on the assumption that GDP may decline by 3% with a subsequent deflationary effect on consumer price inflation, the reduction in CPI inflation leads to a further drop in interest rates making goods bought on credit more affordable. “In this scenario, we expect house price inflation will end the year off at -3.9%.”
Scenario 2: Uncharted territory
A negative house price growth of 8.8% is forecast under this scenario and while it sounds alarming, one must note that, during the 2008 property crash, price inflation dropped to -5.4%, De Kock says. At this time economic growth declined only by 1.8%. “This scenario assumes a drop in GDP of 6% without a noticeable reduction in CPI inflation, leaving limited moving room for further interest rate adjustments.”
Scenario 3: All bets are off
The worst-case scenario assumes a negative GDP growth of 10% with an increased reliance on expensive imports due to the country’s weaker currency. This will ultimately drive inflation up and force the Monetary Policy Committee to reverse its downward interest rate cycle. Under this scenario, Lightstone predicts that house-price inflation could end the year at -14.5% but warns that under such conditions “all bets are off” as the usual predictive interplay between GDP growth, CPI inflation, interest rates and house-price inflation will start breaking down.
De Kock says that these three scenarios are analytical predictions based on the potential outcome of the compounded effect of the lockdown restrictions on businesses and households.
But he emphasises that a more accurate forecast can be made only later in the year as the length and subsequent effects of the lockdown are better understood and reflected in home sales data. FNB data shows that house-price growth is already starting to tumble, with April’s inflation falling to 1.9%.
This is down from 2.5% in March – the slowest pace since December 2009, says the bank’s property economist Siphamandla Mkhwanazi. Furthermore, the impact of the lockdown on the housing market is not yet fully reflected in the latest data as the FNB index is constructed using mortgage approval data, and there is generally a lag between mortgage applications being submitted and approved.
“Approximately 60% of the April sample relate to applications that commenced prior to the lockdown.” Since the implementation of the lockdown, market activity has almost ground to a halt, with preliminary data showing that volumes plummeted by around 60% year-on-year in April – or 62% compared to the past 12 months’ average monthly volumes.
“This is consistent with our view that the pandemic will have a larger impact on transaction volumes than on price. A lack of transactions will, unfortunately, make gauging house price trends difficult in the coming months,” Mkhwanazi says. Looking ahead, he says economic activity is set to contract significantly in the near term, mainly as a direct result of the measures adopted to suppress the spread of the virus.
“Commensurately, we expect, as a base case, that house prices will decline by around 5% and transaction volumes by around 45% this year. In comparison, prices declined by an average 1.5% (according to the FNB HPI) and transaction volumes by around 40% in 2009 during the global financial crisis.