Residential demand push property prices higher

Property prices continue to rise on the back of a strong residential demand. The June FNB House Price Index continued to show rising year-on-year growth of 12.6%, which is higher than May’s revised rate of 12.2%.

According to FNB Home Loans Property Strategist, John Loos, this growth is higher than May’s revised rate of 12.2% and is the 7th consecutive month of positive year-on-year growth.

“In real terms, adjusted for CPI inflation, this all translates into house price growth of 7.2% year-on-year for May,” says Loos.

However, he says there are signs that the pace of acceleration in year-on-year growth is starting to slow. Whereas the growth acceleration from March to April was 2 percentage points, and from April to May 1.9 percentage points, the latest acceleration was down to 0.4 of a percentage point.

“While we would need a few more months’ worth of data points to confirm any trend change towards lower house price inflation, it is plausible that we are now approaching the peak in year-on- year growth for two reasons.

“Firstly, in the 2nd half of 2009 the rate of decline began to slow and then ultimately we returned to inflation late last year. So, as the 2nd half of 2010 progresses the higher base effect will begin to play a role in making year-on-year growth that much tougher to achieve.

“Secondly, since August 2009 there has been a lack of interest rate cutting, with only one further half a percentage point cut this year”.

He says the impact of last year’s 5 percentage points’ worth of interest rate cuts should begin to wear thin on demand growth, which would ultimately begin to feed through to price growth.

“An exacerbating factor has been the relatively high household debt-to-disposable income ratio (still a high 78.4% in the 1st quarter), which has limited the household sector’s response to last year’s interest rate cuts,” he says.

Loos says year-on-year growth is near to its peak, and that as the year moves to an end the country will see a de-celeration of house price growth back towards single-digit year-on-year rates by year-end.

Since July 2000, the nominal cumulative increase in the FNB House Price Index has been 203.1%. In real terms, adjusted for consumer price inflation, the index has risen cumulatively by 70.4% from June 2000 to May 2010. The average price of homes included in the index was R793,152 in June.

The recent recovery in residential property since early in 2009 has been a simple “no-frills” affair, which in a way is a healthy situation.

“We believe it has been overwhelmingly driven by primary residential demand, with non-essential buying such as buy-to-let, holiday property buying and, importantly, speculative buying being very much on the backburner,” says Loos.

He says with many property investors prone to basing their investment decisions on recent past performance of an asset class, residential property in recent times has not attracted them in droves.

“As for the dreaded speculative buying component, this can often be credit-driven, with speculators taking advantage of short term capital growth which far outstrips the interest rate at which they borrow, to make a “quick buck” and repay the debt within a short period of time,” says Loos.