Despite recent signs of demand improvement, house prices continue to “muddle along”, the result of a weak economy, high levels of household indebtedness, and a still-poorly balanced market

The FNB House Price Index for October 2012 showed further moderation in its year-on-year inflation rate, from a revised 4.4% in September to 2.7%. This is the 7th consecutive month of tapering growth since the 8.4% peak in year-on-year growth reached in March 2012. The average value of homes transacted in the FNB House Price Index was R833,659 in October.

This slowing year-on-year house price growth, to levels back below consumer price inflation, implies a return to declining house prices in inflation-adjusted real terms. As at September (October consumer price inflation data not yet available), the combination of a CPI inflation rate of 5.5% year-on-year, and a 4.4% house price growth rate in that month, translated into a real year-on-year decline of -1.01% in the FNB House Price Index.

The return to low single-digit year-on-year house price growth does not come as too much of a surprise. There was indeed a lone interest rate cut of half a percentage point in July, but against this the market is not yet well balanced between demand and supply, the level of household sector indebtedness remains high and has begun to rise again, and the economy remains under significant pressure.

FNB Comments:

Therefore, although estate agents and valuers have both reported some recent market improvements, which may well feed through mildly into house prices in the remainder of 2012,we believe that under the abovementioned SA’s buying population will be watching its wallet closely.


According to the FNB House Price Index, the peak of real house price levels at the end of the most recent boom was in February 2008. From that month up until September 2012, the cumulative real house price decline was -17.1%. While this appears to be a significant downward correction, the real price level remains +61.6% higher than July 2000, the starting month for the FNB Index and also a period early in the last house price boom. In nominal terms, since February 2008 the cumulative increase up until October 2012 was a very mild +8.8%, although still a massive +218.6% up on June 2000.


Looking forward, we believe it possible that the declining trend in year-on-year growth in the FNB House Price Index will come to a halt late in 2012, and that indications of recent improvement in residential demand, both from our valuers as well as from our FNB Estate agent survey, will lead to some stabilization in the house price growth rate. Certainly, the noises from market players seem to point to a recently better demand situation in the market, and we would expect that to translate into slightly higher price growth in the next few months.

However, looking forward into 2013, while year-on-year price growth may pick up a little from the October low level, we are of the expectation that overall house price growth will be a little slower next year than the average for the entire 2012.This is based on our view of the global and domestic economy, both under significant pressure at present, as well as on the level of household sector indebtedness.

The average price growth for 2012 is projected at 6.1%, with only 2 months’ worth of data left to come. However, not only does the global and local economy remain mediocre, but more importantly for the housing market is that we have seen real disposable income growth broadly slowing, since the very strong rates of near to 6% in 2010/early-2011, down to 3.5% by the 2nd quarter of this year. We believe that it will now move in a slower range closer to economic growth rates, because the rapid “normalization” (growth) in the wage bill as well as investment income, off a low base after the 2008/9 recession, has all but been completed.

This in turn curbs the growth in purchasing power growth of households. On top of this, we have recently started to see accelerating household credit growth draw level and start to overtake nominal disposable income growth. This accelerating household credit growth is driven by very strong growth in the non-mortgage credit components, and is the cause of a resumption of an unhealthy rise in the debt-to-disposable income ratio for the household sector. Strong growth in non-mortgage credit could increasingly constrain the household sector’s ability to purchase property going forward.

And finally, we head towards 2013 with a mildly rising consumer price inflation rate, with a recent US drought exerting recent upward pressure on food prices, and rand weakness also having some impact on higher petrol prices. Within the CPI, housing-related Municipal rates and utilities tariffs remain troublesome, and are not set to stop their strong rise soon, with Eskom preparing the next round of multi-year tariff hikes.

These are the realities that we look set to have to face in 2013, and the expected result is a year of low average house price growth of 4%, which, given a higher expected consumer price inflation rate, would translate into further real (CPI inflation-adjusted) house price decline to the tune of -2.5% as the long term downward correction in real prices continues. The 4% price growth rate would reflect a slight improvement from the low October year-on-year growth rate, but a lower rate than the projected 6.1% average for the entire 2012.

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