House price inflation continues tapering trend

Posted On Friday, 08 May 2015 09:30 Published by
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According to the FNB House Price Index, the average house price for April 2015 rose 5.0% year-on-year.

John Loos FNB

This is slightly slower than the previous month’s revised 5.2%, and continues the slowing year-on-year price inflation trend of recent months.

Despite the nominal house price inflation slowdown, however, recent months’ house prices continue to grow positively in real terms, when adjusted for CPI inflation. As at March (April CPI stats not available yet), real house price inflation was 1.1% year-on-year, kept in positive territory by a still-low CPI inflation rate of 4.1%. However, real house price inflation is now diminishing, as CPI inflation starts to rise once more and house price inflation slows. The average price of homes transacted in March was R997,311.

Examining the longer term real house price trend (house prices adjusted for CPI inflation), we see that despite some rise in recent years, (+5.2% since the October 2011 low) the average real house price level remains -18.3% below the high reached in December 2007 at the back end of the residential boom period. Looking back longer though, the average real price remains 67% above the January 2001 level, a time back just before boom-time price inflation started to accelerate rapidly.

The FNB Valuers’ Market Strength Index, an indicator of FNB’s residential valuers’ perceptions of the market, continues to point to a well-balanced market, but does not suggest further strengthening in April.

The Valuers as a group have perceived a mild residential demand weakening in recent months combined with slight supply improvements. The result has been that, while the FNB Valuers’ Market Strength Index rating (which reflects the perceived balance between supply and demand) is still above the key 50 level, at 50.53 in April, which means that the Demand Rating is stronger than the Supply Rating, it is nevertheless slightly lower than March’s revised 50.60.

If one considers the fragile economic fundamentals which currently underpin the residential market, it appears likely that the broadly slowing year-on-year house price growth trend is set to continue in the near term. 

Economic data released in April was  a “mixed bag, some showing improvement but the overall picture still one of economic mediocrity. The economy has had a short potential “boost” early in the year from last year’s sharp drop in Global oil prices. This indeed took CPI inflation down to 3.9% as at February, offering the consumer some Real Disposable Income support. This in turn may have led to some February strengthening in real retail sales growth. 

However, working in part against this “oil-positive” has been simultaneously suppressed metals commodity prices, which impacts negatively on SA export growth and thus on the economy, while the Electricity Sector’s supply constraints have been disruptive once more in the 1st quarter of 2015. So, while February mining showed a return to positive growth, the Manufacturing PMI for March and April reverted to levels below 50, signaling more possible contraction in the large Manufacturing Sector, which bodes ill for the overall economy.

In addition, the SARB Leading Indicator remains in negative year-on-year territory, offering little hope of any meaningful near term economic improvement, while CPI inflation starts to turn higher once more, which is expected to put the interest rate hiking debate back on the table later in the year.

All of this means that the Residential Market continues to lack in growth drivers from here onward, it would seem. It is, however, difficult to see any sharp house price slump in the foreseeable future, with residential building activity growing but still at modest levels, implying limitations to new residential supply entering the market. Average house price inflation thus appears set to slow gradually, moving below the 5% mark into lower single-digit territory in the coming months.


Last modified on Friday, 08 May 2015 10:08
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