Property Barometer – Monthly Residential Market Risk Overview

From a mortgage lender risk point of view, May residential property-related data remained a “mixed bag”. On the one hand, one has economic data still pointing to a stagnant South African economy, and all the structural concerns remain. In addition, certain May data releases did point to a deterioration in Household Sector Credit Health in the early stages of 2016. On the other hand, however, there remains little sign of any cause for dangerous “over-exuberance” either from a mortgage lending sector or a borrower point of view.

May was a month when the Rand came under some renewed pressure for the 1st time since the Minister of Finance issue late last year. The currency had a reasonably good run up to May, but then the Trade-Weighted Effective Exchange Rate depreciated by just over -8% over the month. Much of the positive sentiment surrounding Finance Minister Pravin Gordhan’s re-appointment late in 2015 appears to have subsided, and the widespread concerns over country ratings downgrades and “Junk Status” have re-surfaced as we approach some key ratings agency decisions. Rand fluctuations will continue, and already the currency has recovered somewhat early in June, but the scrutiny on South Africa appears to have intensified once more.

That bout of Rand weakness during May influenced some mild rise in market expectations for interest rate hiking, and therein lies the key link between the Rand and the residential market, Rand weakness not being positive.

On the economic data front, the best one could say was that certain data releases pointed to a slightly “less weak” economic environment as South Africa entered the 2nd quarter of 2016. The evidence is not overly convincing, but the Manufacturing Purchasing Managers Index (PMI), a key up to date barometer of the economic environment, has been above the crucial 50 level in recent months, signaling some possible expansion in output in this major sector after prior months of contraction. And the OECD and SARB Leading Business Cycle Indicators, while still in year-on-year decline, have showed slower rates of decline early in 2016 compared to late in 2015. For the rest, though, economic weakness was widely evident, and the economy doesn’t appear overly supportive of housing demand growth.

But that “slightly less weak” economic environment may just have been enough to cause a mild “bump-up” to average house price inflation, with the FNB House Price Index year-on-year growth rate accelerating from 7% in the prior month to 7.4% in May.

Other small evidence of a “less weak” environment came from the FNB Valuers’ Demand Strength Index. Whilst FNB’s valuers (as a group) didn’t perceive strengthening demand, they have pointed to a slowing pace of residential demand deterioration recently. But that’s about as good as it gets. The valuers still perceive a well-balanced residential market on a national average basis, for the time being, but their Demand Rating continues to weaken and they have recently pointed to rising residential supply, which ultimately could weaken that Market Balance.

Household Sector transaction activity data lags a few months, but the growth in transaction activity was seen to slow through 2015 to reach a negative rate by late-2015/early-2016, so the residential market hasn’t been much of a growth market in recent times.

But the good news from a market risk point of view is that there appears little indication of any “over-exuberant” behavior nationally, at present, although the strong Western Cape market could well invite some such behavior and become an exception to the national rule. Mortgage lending rates remain above national average house price inflation, taking the market largely away from dangerous large-scale speculation.

Examining mortgage market data, too, there appears little sign of “exuberance”. Mortgage originator, Ooba, actually reports a slight rise in average differential above Prime Rate on mortgage loans recently, so a “pricing squeeze” on home loans doesn’t appear on the cards of late. In addition, we see little movement in the average Loan-to-Purchase Price (LTP) on an industry-wide basis.

In short, therefore, May data releases continued to suggest that the residential market remains largely “rational” in its behavior, with little reason to be concerned about “over-exuberant” behavior that risks causing big market “overshoots”. But while some data pointed towards a slightly less weak economic environment, the economy remains stagnant at best, and its health continues to pose a major risk to the housing market’s future well-being.

Read more here: FNB Property Barometer_Residential_Property_Monthly_Jun_2016