How the current state of the economy is affecting house prices

The South African economy has been under strain for over a year, with no signs that this stress will alleviate in the coming months or the next year.

But what does this economic strain mean for house prices?

Fewer buyers means home prices are decreasing

Homeownership is becoming increasingly unaffordable for potential South African buyers, proven by the growing number of renters, as vacancy rates decreased by 3.5 percentage points from 11.71 per cent in Q4 2021 to 8.13 per cent in Q4 2022.

Those rentals vacancy rates are indicative of the economic pressure South Africans are facing. 

Most South Africans have their budgets stretched to the limits, meaning fewer first-time buyers can pass lenders' affordability assessments. 

Lenders looking to reduce risk will likely deny more bond applications. Even lenders willing to take the risk may not approve a first-time buyer for a home loan they would typically qualify for under better market conditions. 

Regardless of the outcome of a loan application, many buyers, particularly first-time buyers, are exiting the real estate market, opting out of buying and embracing renting long-term. 

Unfortunately, fewer buyers mean house prices are trending downwards because, like most economic sectors, the property market's performance relies on the forces of supply and demand to regulate housing prices. 

And in a recession, that downward trend is accelerated. But are we in the midst of a recession? 

Is South Africa experiencing a recession?

A decrease in demand is a sign of the times, but that doesn't necessarily point to South Africa being in the throes of - or on the brink of - a recession. 

Demand can also decrease at the end of a property market boom, signalling that house prices will stabilise and end a cycle of skyrocketing prices. 

That is part of what is happening now, but a recession is also a real possibility. 

The recent demise of global banks like Silicon Valley Bank and the near-demise of Credit Suisse hints that a global recession could be imminent.

Some veteran investors are warning that the "everything bubble" - an economic cycle that crosses multiple sectors and industries - will pop later in 2023 or early 2024, insisting that markets could tumble by 50 per cent when that happens.

Why would that matter in South Africa?

South Africa's economy - and GDP - is closely tethered to international markets. Many luxury home buyers and sellers also have exposure to offshore investment vehicles, meaning they're likely to postpone plans to purchase real estate. 

Is it all doom and gloom for property prices in South Africa?

Not entirely.

For homeowners who've had their properties for five years or more, there will be some price appreciation, meaning this could be the perfect time to sell, especially if you intend to buy again, whether to upsize, downsize, or relocate.

Sellers, who intend to purchase another home, will have the best time in the current property market because home prices are stabilising. 

For most sellers, this means they can still make a sizeable profit from selling their current home, which they can put toward the purchase of another house, cheaper now than the property would be at the height of the market.

However, there is a silver lining for certain types of property. 

Prices for apartments and townhouses in security complexes are likely to increase, spurred by two market conditions:

An Increase in homeowners downsizing 

Unfortunately, with less wiggle room, more homeowners have to downsize to survive the current state of the economy. 

Currently, South Africa has an inflation rate of 6.9 per cent, outstripping the average salary increase, which hovers at 5.9 per cent. 

Owning a larger home is also becoming increasingly unaffordable for South African families as they have to contend with multiple double-digit electricity tariff increases, a double-digit prime lending rate that's exploding the amount homeowners pay on their bond, and hawkish municipalities hiking rates and taxes. 

To hedge against this kind of hostile environment, homeowners are downsizing in droves, preferring smaller, well-located properties to costly large-family homes. 

Townhouses and cottages have become especially popular for growing families, increasing demand for these property types. 

Older, well-maintained homes are also getting their moment in the sun, offering buyers better value overall. 

Rise in Investors

As markets become more turbulent, risk-averse investors divest from stocks and reinvest in the property market to hedge their bets. 

This is even better news for sellers wanting to sell apartments and townhouses as investors increase demand for these types of properties. 

Offloading your apartment or townhome to an investor is one way to secure a lucrative deal because investors aren't as reliant on lenders. 

It's also demographics like investors and downsizing families that will ensure the prices of apartments and townhouses - particularly those in security complexes - continue to soar. 

Yes, the current economic climate may affect the price of a five-bedroom, half-acre property, but for the average seller, there's still a profit to be made while selling in these conditions.