Broad slowing growth trend in house prices continues: FNB index

The FNB house price index inflation rate for August slowed mildly further‚ continuing a broad price growth slowdown starting back in early-2014 - the further slowing was hardly surprising‚ coming on the back of ongoing economic stagnation with a rising risk of recession‚ and gradually rising interest rates.

The index for August 2015 rose by 4.9% year-on-year.This was down from the revised 5.2% for July‚ continuing the trend that started back early in 2014 where house price growth hit a multi-year high of 8.6% at the end of 2013.

“In the past month‚ little has changed in terms of the broader growth trend in the FNB house price index. Since way back in 2014 we have made mention of a broad slowing trend in average house price growth‚ in response to the combination of a multi-year weakening in economic growth along with the start of interest rate hiking early in 2014‚” John Loos‚ household and property sector strategist said on Tuesday.

In real terms‚ when adjusting for CPI (consumer price index) inflation‚ the rate of house price growth had slowed to 0.3% year-on-year in July (August CPI data not yet available); with rising CPI inflation of 5% only marginally lower than July house price inflation.

“It is likely that the real house price rate of change in August will come in at zero or even negative‚ given slowing house price inflation and rising CPI inflation. The average price of homes transacted in August was R1‚002‚665.

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“Until recently‚ the key drivers of the broad year-and-a-half slowing house price growth trend have emanated from the demand side of residential property‚ but more recently we may have seen signs that supply side factors are also just be beginning to play a role‚’ he said.

The key factors suppressing residential demand growth‚ were first‚ the Reserve Bank that began its gradual interest rate hiking cycle in January 2014 - hiked by a total of one percentage point over the first year-and-a-half‚ the most recent 25-basis point hike was in July.

“While the small magnitude to date does not break the bank‚ it arguably leads to a little bit more caution in home buying‚ taking a bit away from residential demand‚” Loos said.

Second‚ the economy continued its broad multi-year stagnation‚ causing gross domestic product growth (GDP) to slow‚ from a post-recession high of 3.2% in 2011‚ to 1.5% in 2014‚ and the indications “are that 2015 may be even slower”.

“This has slowed employment and wage bill growth in second quarter 2015 GDP numbers were particularly bad‚ showing 1.2% year-on-year growth while contracting by -1.3% on a quarter-on-quarter annualised basis.”

Third‚ recent quarters have seen a dramatic drop in consumer confidence levels. The FNB-BER consumer confidence index dropped to a negative level of -15‚ the lowest level in 15 years.

“This may not only be a function of a deteriorating economy‚ but also driven by concerns over the longer term future of South Africa‚ given a raft of bad news relating to economic management and the conditions of state owned enterprises‚ especially in the area of electricity supply‚” Loos said.

“On the supply-side‚ an acceleration in growth in residential buildings completed‚ to 31.9% year-on-year in the 2nd quarter‚ has the potential to begin to alleviate residential supply constraints in certain areas where they exist‚ should positive growth be sustained through the 2nd half of the year.”

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Examining the longer term real house price trend (house prices adjusted for CPI inflation)‚ Loos said “we see that despite some rise in recent years‚ (+3.5% since the October 2011 low) the average real house price level remains -19.6% below the high reached in December 2007 at the back end of the residential boom period”.

Looking back longer though‚ the average real price remained 64.2% above the January 2001 level‚ a time back just before boom-time price inflation started to accelerate rapidly.

Real house price levels thus remained at “boom time” levels‚ in FNB’s view‚ despite having lost some ground since the end of 2007. In nominal terms‚ when not adjusting for CPI inflation‚ the average house price in July 2015 was 272.5% above the January 2001 level.

The worse than expected second quarter GDP figure‚ an alarming drop in the second quarter FNB-BER consumer confidence index‚ and recently a sharp month-on-month decline in the FNB valuers residential demand rating‚ suggested that a recession had become a distinct possibility

“Our most recent average house price growth forecast is 5.4% for 2015 as a whole‚ slowing to 4.2% in 2016.

“However‚ those forecasts are based on low positive economic growth continuing in South Africa during 2015/2016. This is an increasingly hazardous assumption to make as China’s economic cracks widen‚ and South Africa’s own structural constraints get seemingly worse.

“We would thus say that the house price forecast risks lie very much to the downside of the recent forecast. In a China “Hard Landing” scenario‚ and a resultant domestic recession‚ the risk of house price deflation becomes very possible‚” Loos said.