2016 represented further average house price growth slowing, moving into negative territory in real terms

Posted On Monday, 09 January 2017 12:54 Published by
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The FNB House Price Index for 2016 as a whole rose by 5%, slower than the 7.2% and 6.5% for 2014 and 2015 respectively.

John_LoosFNB

Examining monthly figures, the rate of house price inflation had slowed to a lowly 1.6% year-on-year by December 2016. There are various signs of a mildly improving economy to come in 2017, and indeed we do expect economic growth to move slightly higher to around 1% this year. That could conceivably take house price growth a little stronger later on in 2017. However, for 2017 as a whole we still anticipate average house price growth to be slower than 2016, at around 3%, due to a very weak start to the year.

2016 HOUSE PRICE GROWTH SLOWED ON 2014  AND 2015

The FNB House Price Index for 2016 as a whole averaged 5% growth on 2015. This represents the 2nd consecutive year of slowing average house price growth, from a multi-year “high”: of 7.2% in 2015 and 6.5% in 2015.

In real terms, when adjusted for consumer price inflation (CPI), based on the 1st 11 months of 2016 (December CPI data not yet available), it would appear that 2016 experienced a small “correction” in average house prices to the tune of -1.2% real decline.

The real house price decline in 2016 came as no surprise, with a slowing housing market being the result of a broad slowing in economic growth since around 2012, and 2 years of mild interest rate hiking from early-2014 to early-2016.

DECEMBER FNB HOUSE PRICE INDEX FINDINGS

The 2016 annual average price growth rate of 5%, however, was largely due to better growth in the early stages of 2016, with the latter half showing a steady slide.

Examining the monthly statistics, the FNB House Price Index for December 2016 saw its year-on-year growth rate reach a lowly 1.3%, from a November rate of 1.9%. This represents the 8th consecutive month of slowing year-on-year price growth, and is the slowest year-on-year rate of increase since May 2011.

The average estimated house price for December was R1,055,210.

What is also noticeable in these past 8 months is that the pace of slowdown in growth has been noticeably more rapid than any slowing growth phase of the past 5 years or so, and the rate ended the year sharply lower than the 2016 high of 6.9% in April.

The slowdown is the lagged impact of residential demand that has been slowing for some time. Other of our residential market indicators, such as our FNB Estate Agent Survey Activity rating, have shown decline since well back in 2015, so we are merely seeing the lagged impact of weakened market fundamentals feeding through into house price inflation.

In real terms, one could say that something of a price “correction” is under way. Adjusting for CPI (Consumer Price Index) inflation, the average real rate of decline was -4.4% year-on-year in November (December CPI data not yet available), given CPI inflation still above 6%, and the December real decline promises to be even more significant given further slowing in nominal house price growth.

REAL HOUSE PRICE LEVELS

Since December 2015, the average house price in real terms has declined by -4.7%.

Since the end of 2007, the boom time real house price high point, real prices are -22.2% down.

Looking back further though, the average real price currently remains 61.5% above the End-2000 level, back in the early years of the index before the boom time price surge really kicked in.

Real house price levels thus remain high compared to pre-boom time levels, the boom having been from early last decade to the end of 2007, despite some noticeable “correction” since the end of 2007.

MONTH-ON-MONTH, THE FNB HOUSE PRICE INDEX REMAINS IN DEFLATION

While the year-on-year house price inflation rate manages to hang on to some low positive growth, on a month-on-month seasonally adjusted basis the FNB House Price Index has shown 5 consecutive months of price decline.

The month-on-month seasonally adjusted calculation is a better way to look at recent growth momentum.

While in its 5th month of month-on-month decline, the rate of decline has diminished slightly in recent months, from a low of -0.33% month-on-month decline in September, to a lesser -0.2% by December 2016.

The periodic short dips in the month-on-month rates of change, either to lower inflation or most recently into deflation, appear to broadly co-incide with the short term fluctuations in the economy’s performance. The Manufacturing Sector Purchasing Managers’ Index (PMI), one of the economy’s leading indicators, has once again dipped to below 50 in recent months, signaling some contraction in this large and cyclical sector. This sector is a good barometer of the direction of economic growth much of the time, and the fluctuations in the month-on-month house price rate of change thus merely appear to be tracking economic fluctuations.

Diminishing rates of house price deflation, month-on-month, could thus suggest that the economy may once more be set to move into a slightly stronger period, or perhaps better put, a “less weak” period.

CONCLUSION

2016 represented the 2nd consecutive year of annual average slowing in house price growth, and by the end of the year the monthly price growth figures had become very weak.

There are various early signs of a mildly improving economy to come in 2017, notably from the SARB’s Leading Business Cycle Indicator, which turned to positive year-on-year growth late last year. There have been signs of a mildly improved global economy, accompanied by stronger global commodity prices. This could boost local economic growth mildly via the country’s exports. In addition, while far from over, domestic drought conditions could be less severe in 2017.

Therefore, from rates near to zero, we do expect economic growth to move slightly higher to around 1% this year. That could conceivably lead to mildly stronger household income growth and housing demand, and thus take house price growth a little stronger later on in 2017. However, for 2017 as a whole we still anticipate average house price growth to be slower than 2016, at around 3%, due to a very weak start to the year.

Last modified on Monday, 09 January 2017 13:10
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