Reflecting on the residential property market of 2020

2020 has been one of the most challenging years in decades, not only for our country, but for the world in general. Little did any of us know what waited on us as the countdown to 2020 commenced.

 

As we now countdown towards 2021, this gives us the perfect opportunity to reflect on the property market of 2020 and look towards the expectations for the coming year.

 

The already strained South African economy was hit hard by the Coronavirus pandemic and the resultant economic lock-down. With the exception of a number of essential services, the economy basically ground to a halt during the initial stages of the lock-down.

 

 

The rental market has been negatively impacted by the pandemic and the low interest rate environment. We are seeing higher levels of vacancies right now as the financial impact of the pandemic on the average South African takes its toll. This gives tenants considerable choice and room for negotiation.

 

University towns like Stellenbosch and Potchefstroom, that normally have a very active and dependable student rental market especially felt the impact of the pandemic. As classes moved online, many leases were cancelled leaving landlords with little choice than to offer their apartments at reduced rates.

 

According to the TPN Rental Data for Q3 of 2020 low end rentals (rentals R25000pm) contracted by 50% from 1.8% market share to just 0,9% market share, spurred on by a 23% vacancy rate. However, no sector was left unscathed.

 

Airbnb rentals also remain under pressure and will likely remain so until international and tourist travel is back to its pre-covid levels. The rental market has also not been helped by the historically low-interest rates that lead to an exit of many tenants from the market as they become first time homeowners. Financial pressure is expected to keep the rental market under pressure with low yields and affordable rentals.

 

 

The real estate industry was effectively locked out of the economy between 27 March 2020 and 31 May 2020, only being allowed to operate under Level 3 lock-down which commenced on 1 June 2020. During those challenging and uncertain months, general consensus amongst the industry was that apart from some expected pent-up demand once re-opened, that the industry was in for a long hard year with price drops of between 5% and 15% being forecasted at the time.

 

The actual performance of the residential sales market has been nothing short of unexpected. At Meridian Realty we experienced a 50% growth in sales in June 2020, vs June 2019. Initially, that was attributed to the expected pent-up demand. However, in July 2020 we achieved our highest sales figure on record since the company was founded in 2005. The trend continued with more record setting months in August and September, followed by an astounding October where our sales volumes in rand value was more than double what our figures were for July!

 

Interest rates dropped to the lowest level in over 50 years. The historically low interest rate environment has subsequently created the opportunity for many South Africans to enter the property market for the first time, with the gap between renting and buying getting ever closer and in certain areas it even became cheaper to buy than to rent. The demand was however not only fueled from first time buyers, but also from buyers that could now purchase in price ranges they could not previously afford. There was especially strong demand for properties between R500k and R3m.

 

FNB data indicate that household mortgage advances show early signs of acceleration as the Residential Property Market heats up. Industry-wide data have showed bourgeoning home buying activity, with the volume of mortgage applications having reached multi-year highs in 2020.

 

This does beg the question how sustainable the current momentum is.

 

In our opinion the increased volume of transactions is fueled by lower interest rates, attractive market pricing and the changing housing needs of consumers due to the impact of the pandemic. All of this occurs against a backdrop where the liquidity in the market remains relatively intact.

 

On the downside, if job losses spread to more white-collar occupations, then we could expect to see further weaknesses in house price growth in 2021. The market however remains driven by the low to mid-price segments from around R1.5million up to R3 million, largely buyers who need home loans. These are predominantly buyers with fixed incomes who are not particularly affected by the Covid-19 pay cuts which we have seen in industries such as tourism and more informal sectors.

 

Inflation remains at the lowest levels since 2004/2005, which bodes well for interest rates remaining at these historically low levels well into 2021. The other interesting thing about the current market is that it is incredibly well-balanced. Normally these kinds of activity levels would lead to stock shortages, but due to the impact of the pandemic the market remains adequately stocked. Prices are therefore not running away, and buyers are still able to take advantage of the favorable interest rate and bank lending conditions.

 

No one holds a crystal ball when it comes to 2021, but our expectation is for residential sales activity to remain relatively bullish for most of the new year.