SA low house growth tipped

The FNB House Price Index for January 2017 rose by a mere 0.3% year-on-year, having already been in month-on-month seasonally adjusted decline for the past 6 months. This continues the slowing year-on-year price growth trend since April of 2016. We continue to project low but positive single-digit nominal house price growth for 2017 as a whole, in the region of 2-3%. This overall growth for the year, however, would be driven more by some house price growth in the latter stages of 2017, as the FNB expectation of some economic growth strengthening starts to have some positive impact on residential demand, but the 1st half of the year looks set to be fairly “flat”. FNB property analyst John Loos reports

1 February 2017 – The FNB House Price Index for January 2017 saw its year-on-year rate of increase slow further to a mere 0.3%, from a 1% revised rate in the previous month. This represents the 9th consecutive month of slowing year-on-year house price growth, from a 2016 “high” of 6.9% back in April of last year.

In real terms, when adjusted for consumer price inflation (CPI), the index recorded a year-on-year decline in December 2016 of -5.4%, (January CPI data not yet available). In December, CPI inflation measured 6.8%, while revised house price inflation was a lowly 1%.

Real year-on-year house price decline has been taking place since July 2016.

The average house transaction price in January 2017 was R1,049,038.

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, while the estimated average time of homes on the market prior to sale had risen from 11 weeks and 1 day in the 1st quarter of 2016, to 15 weeks by the final quarter estate agent survey.

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 6 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 6th month of month-on-month decline, the rate of decline has diminished slightly in recent months, from a revised low of -0.38% month-on-month decline in November to a lesser -0.31% by January 2017.

The periodic short dips in the month-on-month rates of change, either to lower inflation or most recently into deflation, appear to broadly coincide 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, signalling 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.

Real house price levels only slightly up

Examining the longer term real house price trends (house prices adjusted for CPI inflation), we see that the level as at December 2016 was a mere +0.3% up on the November 2011 post-recession low, having lost -5.4% since December 2015. On a cumulative basis, therefore, real house prices have made very almost no progress since the post-recession low point in 2011.

The average real house price level is -22.8% below the all-time high reached in December 2007 at the back end of the residential boom period.

However, looking back further, despite a mediocre performance in recent years, the average real price currently still remains a massive 61.0% above the Beginning of 2001 level, around 16 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore still regard current real price levels as high by historic standards despite recent weakness.

In nominal terms, when not adjusting for CPI inflation, the average house price in January 2017 was 291.3% above the end-2000 level.

Slow disposable income growth

The ongoing slowdown in year-on-year house price growth to near zero is very much reflective of ongoing weakness in the Household Sector’s confidence levels, as also seen in the weak FNB Consumer Confidence Index readings of recent years.

This, in turn, is reflective of slow disposable income growth in a virtually zero economic growth environment, following a multi-year growth slowdown. Further pressures on household disposable incomes emanate from elevated consumer inflation, especially in the area of food prices, which have been drought influenced, and of course ongoing increases in the effective personal tax rates of households. Finally, one mustn’t forget that interest rates have risen moderately in recent years.

All of the above has served to gradually slow residential demand in recent years, finally reaching a point where residential stock constraints have by-and-large been eliminated, reaching that critical point in the demand-supply balance where house prices have started to decline in real terms (i.e. when adjusting for CPI inflation).

We continue to see certain signs of a small recovery in the economy to come in 2017, with the SARB’s Leading Business Cycle Indicator continuing its upward momentum of recent months, turning to a positive year-on-year growth of late after a multi-year decline.

But some expected economic growth strengthening in 2017 would only likely impact on house prices in the 2nd half of the year and given a still slow FNB economic growth forecast of around 1.1%, we don’t think that impact will be strong.

Given only 0.3% year-on-year house price growth as at January, and ongoing month-on-month declines, it is possible that we will see some year-on-year price deflation in the coming months. We continue to expect an average low but positive house price growth rate of between 2-3% for 2017 as a whole. But that would be driven more by positive growth in the 2nd half of the year, based on the expectation of economic growth picking up, interest rates continuing to move sideways at current levels, and price growth later in the year coming off the low base set in recent months.

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