Property Barometer – FNB's House Price Index's year-on-year inflation 'skates on thin ice'

The FNB House Price Index for February 2016 rose by 6.5% year-on-year. This is virtually unchanged from the previous 2 months’ revised rates, and mildly down from the 6.9% 2015 high point reached in October.

With the month-on-month average price growth rate having slowed significantly, however, a resumption of the slowing rate of year-on-year growth in the near term is expected. The recent months’ “treading water” in the year-on-year price growth rate has much to do with a low base effect created through a lull in monthly house price inflation early last year.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth slowed to 0.2% in January, from a revised 1.3% in December, the slowing being caused by a rise in CPI inflation, from 5.2% in December to 6.2% in January (February CPI data not yet available).

Examining the longer term real house price trends (house prices adjusted for CPI inflation), the average real price currently remains 69.6% above the January 2001 level, around 15 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. Therefore, the current real price levels are still considered high.

Focusing on the month-on-month average house price inflation rate, some loss of growth momentum in February was seen continually, the rate having slowed to 0.23% on a seasonally-adjusted basis, from 0.25% previous and now significantly slower than the 0.92% 2015 high of September. This should soon translate into slower year-on-year price increases.

FNB’s valuers, in their FNB Valuers Market Strength Index (MSI), appear to provide support in recent months for the expectation of a near term slowing in house price inflation.

The Valuers’ Residential Demand Rating was at a level of 54.92 in February (scale 0 to 100), while the Supply Rating was at a lesser 53.40. This translates into an MSI of 50.76, with the level of above 50 implying that residential demand is still stronger than supply. However, the Residential Demand Index has been in decline since July 2015, the Supply Strength Index in positive growth territory since December 2015, translating into an MSI decline since October 2015. In short, the valuers, on average still perceive a well-balanced residential market, but have in recent times perceived Market Strength to have been deteriorating mildly.

The start of market weakening has to do with the combination of gradually rising interest rates along with weak and deteriorating economic fundamentals. After a Real GDP (Gross Domestic Product) growth rate believed to have been not far from 1.5% in 2015, the FNB forecast is for slower growth of 0.5% in 2016. The further expected slowing in growth is on the back of ongoing global economic and commodity price weakness, with increasing speculation around a possible global recession, and gradually rising interest rates.

The current environment of high social tensions and fragile labour relations continues, and this poses significant downside risk to economic and residential market performance forecasts.

CPI inflation is projected to rise from 4.6% average in 2015 to 6.1% average for 2016, on the back of a now weaker Rand, and higher food price inflation as the drought impact is felt. The SARB is expected to continue to lift interest rates slowly, with Prime Rate peaking at 11.25% in the 1st half of 2017. Much, though, will depend on the Rand’s fortunes and its potential inflationary impact.

Under these weak economic conditions, and their negative impact on household income growth, the forecast is for average house price growth to slow from 6% average in 2015 to a 4.8% average in 2016, and a still slower 3.8% in 2017. While still positive in nominal terms, these projected rates would be below CPI inflation, translating into negative growth in real terms. Such negative real house price growth would reflect both higher interest rates along with ongoing weakness in economic growth, employment and household income growth.

The rental market could begin to mildly outpace the slowing home buying market through the forecast period, in turn leading to rising yields on residential property.

Read more here: FNB Property Barometer_Feb_2016 House Price Index_1_Mar_2016