Research

Household Sector – Housing CPI stubbornly above the 6% upper target limit

The CPI (Consumer Price Index) for Housing remains stubbornly above the SARB 6% upper target limit, and is the 2nd biggest driver of overall CPI inflation behind Food. Municipal Rates and Utilities tariff increases remain the big problem area for the Housing CPI. But the rental market may soon become a little more of an influence in this CPI sub-index’s inflation rate.

Although one of the less volatile sub-indices of the CPI (Consumer Price Index), the CPI for Housing remains the 2nd biggest contributor to overall CPI inflation behind food price inflation (1.6 of a percentage point), and remains stubbornly above the SARB 6% upper inflation target limit.

At 6.52% year-on-year for June, the CPI Housing inflation rate had rise very slightly from May’s 6.48%.

This slight increase was driven in part by a slight acceleration in both Actual Rental inflation as well as Owner Equivalent rent. From May’s 5.18% year-on-year rate, Actual rental inflation rose mildly to 5.3%, while Owner equivalent Rent rose from 5.03% to 5.24% over the same period.

The Flat Rentals and House Rentals categories saw mild accelerations in inflation, the most affordable Flat category now showing the highest inflation rate of 6.1%.

The most troublesome components of the CPI for Housing remain Electricity tariff increases, at 11.3% year-on-year inflation, and “Municipal, Water and Other Services” at 9.81%. The Home Maintenance Sector, by comparison, appears somewhat depressed, showing price deflation of -0.45%, possibly being partly “crowded out” by huge tax and tariff increases of Municipalities and utilities.

Already above the overall CPI inflation rate, where do Housing Costs go from here? We believe there could be some mild acceleration in the Housing CPI inflation rate in the near term, driven higher by a gradual acceleration in rental inflation. Rising interest rates and a weakening economy appear to have started to slow 1st time buying mildly, according to our Estate Agent surveys. A portion of those aspirant 1st time buyers postponing their purchase would remain in the rental market for longer, providing some support for rental demand.

In addition, FNB anticipates an increase in financial pressure-related selling of homes to downscale to cheaper and smaller homes, driven by economic stagnation, and our Estate Agent Surveys show an agent perception that a growing group of these sellers plan to “rent down” as opposed to “buying down”.

South Africa would thus expect a little additional support for the rental market in the near term, and this could be expected to lift rental inflation too. The acceleration would not be a strong one however, as rental tenants, too, have their own financial limitations in these toughening financial times.

Read more here: Property_Barometer_ CPI_Inflation_Housing_20_July_2016