Research

FNB Property Barometer: a return to a higher general inflation environment later this year could see house price growth rising mildly in 2016, but in 'Real Growth' terms, the forecast is lower

Recently, the Global Economy has been in a slower growth patch, the US economy even having experienced a contraction in the 1st quarter of 2015. However, whilst this can have a dampening impact on the South African Economy’s anaemic growth rate, we perhaps ironically expect some very slight strengthening in the country’s real GDP (Gross Domestic Product) growth rate this year compared to 2014.

This is due to domestic factors, however. A very low base was created last year by heavy disruption from strike action, most notably in the Mining Sector and especially in the Platinum Mining sub-sector. The other “disruptive element” is the capacity constraint in the country’s Electricity Sector, an ongoing hazard in economic forecasters’ lives. Therefore, despite a growth dip in the 1st quarter, we believe it still possible for GDP to grow at a mildly faster rate of 1.9% in 2015, compared with 1.5% in 2014, last year’s low base making that “achievement” relatively easy should we be able to “keep the lights on”.

However, the expectation of slightly improved Economic and Real Household Sector Income growth in 2015 is not expected to provide much of a growth boost to this highly interest rate-sensitive residential market. Rather, we foresee that “slower growth” in the residential market will be the order of the day. The market is expected to be constrained by the combination of a still-weak economic growth rate, even if it is slightly better than a poor 2014, as well as by already higher interest rates since early-2014, and by our expectation of a resumption of further rate hiking later this year.

By slower growth we mean slower growth in residential demand, reflected in a forecast of 0.9% growth in our FNB Valuers’ Demand Strength Rating, after a growth rate of 7% in 2014. With regard to residential supply, we would expect some growth here after 2 prior years of decline in the FNB Valuers Supply Rating, as weaker demand growth along with stronger residential development activity alleviates supply constraints. The net result of slowing demand growth and a return to mildly positive residential supply growth would be a slower rate of increase in the FNB Valuers’ Market Strength Index, from 5.5% in 2014 to 0.4% in 2015, before turning to negative growth of -0.5% in 2016

However, perhaps surprisingly, we forecast a slight acceleration in average house price growth in 2016 to 5.6%, after 2015’s average house price growth is expected to come in at 5.3%. The reasoning behind this apparent irony has to do with the general inflationary environment “dipping” in 2015 and expected to recover in 2016. The result of an expected higher CPI inflation rate in 2016 is the forecast of a higher average wage inflation rate next year compared with 2015, which could drive a slight renewed acceleration in nominal house price inflation too.

Where the projected slowing pace of market strengthening is reflected is in our Real house price growth forecast, which is mildly positive at 0.9% for 2015, down from 1% in 2014, but turning to negative to the tune of -1% in 2016.

By “slower growth” in the residential market we are not referring to the rental market, however. One could see some mild pick up in rental inflation should interest rates indeed resume their rise later this year, fuelling rental demand through encouraging some aspirant 1st time buyers to rent for longer and “wait it out”, as well as causing a higher number of sellers selling in order to downscale due to financial pressure to downscale to a rental property as opposed to “buying down”.

We therefore project a mild rise in Gross Residential Yields through our forecast period.

When talking of “slowing growth” we also have to exclude the Residential Building sector in 2015, as we still expect this year’s number of residential building completions to grow positively after a decline in 2014. This would be the lagged impact of a solid existing home market in recently past years, which led to a build up of supply constraints. Building completions then usually follow with something of a lag, due to the lengthy planning, approval and building time frames.

Therefore, we would only expect building completions to revert to decline in 2016.

CONCLUSION

All in all, therefore, some minor increase in economic growth in 2015 is not expected to be any meaningful boost for residential demand growth in a slowly rising interest rate environment. The Home Buying Market is highly credit-dependent and thus interest rate-sensitive, and it is thus realistic to expect some negative impact on residential demand growth to come from interest rate hiking. While nominal house price growth may be slightly stronger in 2016, compared to 2015, this would be due to higher CPI and wage inflation next year and not due to any market strengthening. Rather, one should look at our real house price growth forecast, where house prices are adjusted for CPI inflation, to see our forecasts of weakening residential demand growth being reflected in a turn from positive average real house price growth for 2015 to negative real price growth in 2016.

Read more here: FNB Property Barometer_Housing_Market_Forecast_June_2015

Listen to the podcast and soundbite relating to the residential property market forecast and the outlook for the remainder of 2015 and 2016.