The slowing trend in house price growth continued in September, with financial services company FNB's House Price Index decelerating to 3%, from 3.6% in August.

This means house price growth averaged 3.5% in the third quarter of this year, down from a peak of 4.8% in the second quarter.

"Market strength indicators continue to show moderating demand, following a strong rebound in the second-half of 2020 and into 2021.

"However, these are still above 2019 levels, reflecting the positive effect of lower interest rates on market activity and the changing housing needs due to the pandemic, including greater adoption of working from home and homeschooling," FNB says.

Despite slowing volume growth, the value of mortgage extension continues to grow at a faster pace, supported by demand for bigger loans, reflecting a shift towards higher price brackets, or bigger properties.

"Weaker-than-expected second-quarter labour market data, combined with the potential adverse effects of the recent unrest on employment prospects for the third quarter, suggests that longer-term demand fundamentals will take longer to recover to pre-pandemic levels.

"However, we note a potential upside on non-wage income, especially dividend income, which has boosted income growth for affluent households."

Using the third-quarter FNB Estate Agents Survey results, FNB considered four market activity and sentiment indicators to assess the first-round impact of riots, particularly in KwaZulu-Natal.

At a national level, estate agents’ perception of activity peaked at 6.9 out of ten in the fourth quarter of 2020 but decreased to 6.3 out of ten in the third quarter of this year.

"The deceleration is across most price segments and regions. However, the decline was more noticeable in the KwaZulu-Natal region, where activity recorded 5.5 from 7.2 in the previous quarter, or a 23.6% decline quarter-on-quarter (q/q), compared with a 5% q/q decline at national level."

In line with softer market activity, estate agents’ sentiment, as measured by the proportion of agents who are satisfied with prevailing market conditions, pulled back across most price segments and regions.

"The average time properties spent on the market for sale lengthened for the first time in 12 months, from eight weeks to eight weeks and six days, further signalling cooling home buying activity.

"Once again, the cooling market activity was seen across most price segments and all regions. Compared to the previous quarter, time on the market lengthened the most in the KwaZulu-Natal region, by about two weeks versus the national average of just six days."

Despite this, the indicator remained upbeat, particularly in the Western Cape, presumably in line with activity that is still above pre-pandemic levels and on anticipation that unrest in KwaZulu-Natal would benefit the Western Cape.

The decline was more visible in KwaZulu-Natal, with 51% satisfied with prevailing market conditions, compared with 72% in the previous quarter and the national average of 74% in the third quarter of this year.

The reasons for selling remained broadly unchanged from the previous quarter, and showed that sales were still elevated owing to financial pressure, as well as the slowing trend of emigration-related sales.

However, third-quarter data might be signalling that emigration sales have bottomed and are starting to rise in some segments. Notably, the KwaZulu-Natal region saw an increase in selling owing to security reasons, at 11% compared with 8% in the previous quarter and 7% for the national average.

"It will be interesting to see whether this is a sustained trend or rather a knee-jerk reaction following the riots. The FNB Estate Agents Survey shows some impact on the KwaZulu-Natal region, but relatively small comparatively.

"However, there may still be lingering longer-term effects, particularly on buyer and investor sentiment," FNB says.

FNB is of the view that property prices have been unusually slow to adjust to the weak consumer fundamentals. Support has come from unprecedented factors, such as historically low interest rates, the nature of the crisis that incentivised property ownership, the concerted response from lenders that smoothed the impact of severe job losses on housing markets, as well as the relative abundance of credit despite higher unemployment.

"However, recent data shows that market volumes may have peaked and that market strength is weakening, meaning the demand gap is widening.

"Nevertheless, activity is still enjoying support from cyclical drivers, such as low interest rates, and secular factors, such as changes in human behaviour.

"The recent deceleration in house price growth is in line with our expectations, reflecting waning interest rate-induced demand and swelling labour market pressures. Demand driven by consumer shifts from renting to owning may also have peaked. This is reflected in the stabilising flat vacancy rates and bottoming rental inflation.

"These shifts played a vital role in supporting home buying activity in first-half of 2020 and into 2021, mostly in middle-priced segments.

"With this demand losing momentum, it is not surprising that the deceleration in house prices is more pronounced in middle-priced segments. However, we still expect a better out-turn in annual house price growth in 2021, reflecting comparatively stronger demand and a brighter gross domestic product growth outlook."