YEAR-ON-YEAR HOUSE PRICE GROWTH SLOWED IN OCTOBER
Category Property News
After a brief uptick in year-on-year house price growth as mid-2011 approached, it would appear that a low peak has been reached, and the decline in growth has resumed. After a revised year-on-year growth rate of 5.1% in September, the FNB House Price Index for October saw its growth declining to 4.5%.
The small acceleration in house price inflation earlier this year was believed to be the result of slightly improved affordability of credit after two late 2010 interest rate cuts. The more recent resumption of slowing growth is the result of no further interest rate cutting in 2011, along with slowing economic growth in the second quarter starting to put downward pressure on real disposable income growth.
This slowing nominal house price growth would suggest that the longer term downward correction in house prices in real terms, when adjusted for consumer price inflation, is continuing. In September, given a consumer price inflation rate of 5.7% year-on-year, the 5.1% revised nominal house price growth translates into a -0.6% real house price decline (October consumer price data not yet available)
The October results imply that, since the beginning of the big market “correction”, which we believe began after a real house price boom time peak in February 2008, house prices in real terms have declined cumulatively by -15.7%. In nominal terms, as one would expect in a country with significant consumer and wage inflation, nominal house prices have risen cumulatively by +6.2% since February 2008. However, Since July 2000 when the index started, prices are still up 64.3% in real terms and 211.1% in nominal terms.
The average price of homes transacted in October, according to the FNB House Price series, was R814,011.
Due to seasonality in the house price data, it is essential to statistically adjust the time series in order to remove seasonality should one wish to use month-on-month growth rates as indicators of true (non-seasonal) momentum in the residential property market. On a month-on-month basis, the seasonally-adjusted FNB House Price Index showed further loss in momentum, with growth being negative for the 3rd consecutive month to the tune of -0.62%, down from a revised -0.55% decline in September. This is the continuation of a weakening month-on-month growth trend spanning back to the +1.32% peak of February 2011.
The FNB Valuers’ Market Strength Index continues to provide a plausible explanation for the ongoing weakness in nominal price growth, and real house price decline, because it continues to point to weakness in demand relative to supply. The Market Strength Index has been consistently below the crucial 50 level (scale 0 to 100 with below 50 level indicating stronger supply than demand rating) since September 2008. As at October 2011, this index continued a weakening trend that has lasted since late-2010, declining slightly further to 44.72, from the September level of 44.74. However, this was not due to weakening in the demand rating. To the contrary, the demand rating strengthened slightly in October, but did not quite keep pace with the perceived improvement in supply, thus causing the market balance (Market Strength) to deteriorate slightly further according to valuers’ perceptions. October’s slight weakening in the market balance is not significant. What is significant, however, is the level remaining well-below 50, which we believe suggests that real downward price adjustments are “required”, and in the absence of any major stimulus, either from economic growth improvements or interest rate cuts, this appears to be exactly what is happening.
OUTLOOK – MORE DOWNWARD REAL PRICE ADJUSTMENT LOOKS TO BE ON THE CARDS
Recent months have been “interesting” from both an economic as well as property market point of view, in the sense that we have seen some mild improvements. The FNB Estate Agent Survey for the 3rd quarter showed some slight improvement in terms of agents’ perceptions of residential demand. More recently the FNB Valuers have also pointed to slight increases in demand after a weak 1st half of 2011. With regard to the economy, the September Manufacturing Purchasing Managers’ Index (PMI) rose back to slightly above 50, signaling renewed expansion in the manufacturing sector, and manufacturing is often a good indicator of the direction of overall economic growth in South Africa. Across the ocean we also saw some strengthening in US economic growth in the 3rd quarter compared to the previous quarter.
However, market strength is about level of demand relative to supply of property, and there have been no indications of an improving market balance, with the FNB Valuers’ Market Strength Index weakening further and remaining well below 50. In addition, estate agents surveyed in the 3rd quarter indicated a rise in average time of homes on the market from 15 weeks and 1 day previously to 17 weeks and 1 day, while they also estimated that 91% of sellers are still required to drop their asking price to make a sale, which is a high percentage.
Economically, the SARB Leading Business Cycle Indicator, normally well-correlated with the residential mortgage market, still points to near term weakness, having shown a month-on-month decline of -2.1% in August.
Besides indications that economic growth may keep household disposable income growth at mediocre rates, consumer price inflation also continues to rise, eating into disposable incomes. From 5.3% in August, the consumer price inflation rate rose further to 5.7% in September. The overall inflation rate can be misleading, as it is curbed by the slower rates of price inflation in key consumer items such as motor vehicles, which a household doesn’t purchase that regularly, as well as by mediocre rental inflation, which also doesn’t get felt by homeowners on a monthly basis.
If one examines certain sub-components of the consumer price index, it becomes clear that certain key components relating to monthly household running costs are exerting significant pressure on households currently. Food price inflation has reached 8.7% year-on-year, “water and other services” (including municipal assessment rates and non-electricity utility tariffs) recorded 9.2% increase, electricity 17.3%, and private transport running costs (fueled by a rising petrol price) a massive 21.7%.
Now there are signs that global commodity price inflation is slowing, which should ultimately lead to slowing consumer price inflation in 2012. Therefore, we do not expect interest rates to rise at any time soon, although one should not take this for granted given where CPI inflation currently is. But even in the absence of interest rate hiking, higher consumer price inflation at the present time can exert significant pressure on household spending power all by itself,
Therefore, we are of the opinion that the combination of a weak market balance, signs that the economy will carry on at mediocre growth rates at best in the near term, and significant consumer price inflation pressure on incomes, will keep house price growth under pressure, and that further real price decline will be forthcoming. In nominal terms, too, there exists the possibility of some negative year-on-year house price growth in 2012 .
Ongoing pressure on household purchasing power implies:
• That the more affordable segments of the housing market are expected to outperform the higher priced segments.
• High transport costs due to high fuel prices can support demand in close proximity to key business nodes, and….
• Smaller homes are expected to be more popular as they contribute to reduced running costs.(Coutesy of FNB John Loos Household and Property Sector Strategist)
Mike Bennett
