FNB’s September HPI points to further slowing in the housing market

The FNB House Price Index for September 2016 rose by 3.4% year-on-year. This is slower than the revised 4.8% rate recorded for August, and reflects the 5th consecutive month of slowing year-on-year growth.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth has recently turned negative, having recorded a -1.1% year-on-year decline in August, a weakening on the revised -0.3% decline in July. This real price decline was largely due to the slowing nominal house price inflation rate, while CPI inflation has also been slowing but by a far more gradual rate.

The move to declining real house price levels points to a deterioration in the balance between supply and demand, and certain of the other market indicators have indeed pointed to this in the recent past as well. Most notable has been a rise in the estimated average time of properties on the market prior to sales, as per the FNB Estate Agent Survey. From 11 weeks and 1 day estimated average time on the market in the 1st quarter of 2016, the agents have recorded a rise to an average of 14 weeks on the market in the 3rd quarter survey. The market thus appears to be slowly drifting away from “equilibrium”.

The average price of homes transacted in June was R1,056,774.

Month-on-Month House Price Growth Dip Points to Another Economic Weak Period Arriving

Examining house price growth on a month-on-month seasonally-adjusted basis suggests that a period of renewed economic weakness may once again be setting in after a slightly stronger economic performance in the 2nd quarter of 2016.

The housing market can often be a good leading indicator of economic conditions. Up until May 2016, FB saw month-on-month seasonally-adjusted house price growth accelerate after an early-2016 dip. This was accompanied by a significant uptick in the Manufacturing Purchasing Managers’ Index (PMI), after a similar dip early in the year. It was also accompanied by a return to mildly positive growth in 2nd quarter GDP (Gross Domestic Product), after a 1st quarter contraction.

More recently, however, both the FNB House Price Index and the Manufacturing PMI have pointed to possible renewed economic weakness as South Africa has moved into the 3rd quarter. From a level of 53.7 in June (Scale of 0 to 100), the PMI has dropped significantly to 46.3 by August, while month-on-month seasonally adjusted house price growth has gone from +0.5% in May to -0.4% decline in September.

Therefore, if the housing market is anything to go by, it points to a possible re-emergence of economic weakness in the 3rd quarter of 2016, after a slightly better 2nd quarter. 

Other Key Residential-Related Indicators Pointing to Economic & House Price Weakness

Other residential-related “leading” indicators have also pointed towards the likelihood of a slowdown in house price inflation as well as a weak economic situation.

One of the variables included in the SARB Composite Leading Business Cycle Indicator is that of Residential Building Plans Passed excluding “dwelling houses” smaller than 80 square metres, a leading economic indicator more directly related to the housing market. The time series is quite rough, so FNB has smoothed it very lightly with a statistical smoothing function. The smoothed plans passed data has fluctuated at weak growth levels very near to zero through most of 2016, turning slightly negative to the tune of -1.8% year-on-year in July.

The FNB Estate Agent Survey Residential Activity rating has for some time also pointed toward looming weakness, both for the Residential Market as well as the economy.

The Residential Activity Rating, a reflection of estate agent perceptions of activity levels on a scale of 1 to 10, has slid all the way from 6.73 in the 1st quarter of 2014 to 5.59 by the 3rd quarter of 2016.

On a smoothed year-on-year percentage change basis, the Activity rating picked up “downward speed” in the 3rd quarter, declining by -9% after a previous quarter’s -8%.

The Activity Rating normally leads the growth direction of the Leading Business Cycle Indicator for South Africa (OECD Version), and suggests some likely near term downward acceleration in this Leading Indicator’s rate of decline, and possibly points to weaker GDP growth in the near term too.

In short, a weakening housing market, reflected in both slowing house price growth as well as other of our key residential indicators, may be reflective of renewed economic weakening in the 3rd quarter of 2016 after a slightly better 2nd quarter.

FNB’s Valuers Market Strength Index Edges Weaker

FNB’s valuers, in their FNB Valuers Market Strength Index (MSI) edged weaker in September 2016.

The MSI appears to be more of a “co-inciding” indicator to the residential market, unlike the more leading nature of certain key indicators gleaned from the FNB Estate Agent Survey.

Examining the Demand Rating, Supply Rating and MSI itself, which reflects the difference between Demand and Supply, we see a still fairly well balanced residential market, but the balance is deteriorating.

The Valuers’ Residential Demand Rating was at a level of 54.23 in September (scale 0 to 100), while the Supply Rating was at a lesser 52.71. This translates into an MSI of 50.76, with the level of above 50 implying that residential demand is still perceived to be slightly stronger than supply.

However, the rate of change in the indices is often insightful too.

On a month-on-month seasonally-adjusted basis, the revised Residential Demand Index has been in its latest bout of decline since June 2016. The rate of decline has accelerated from June’s -0.03% to -0.64% by September. This accelerating rate of decline in demand, which has been faster than the rate of decline in the Supply Rating, has translated into an accelerating rate of decline in the MSI, too.
This faster rate of decline in the MSI appears to explain the recent months’ deterioration in month-on-month house price growth.


From both the September House Price Index performance as well the FNB Valuers Market Strength Index, FNB sees further signs of slowing in the residential market.

This is the lagged response to over 2 years of gradual interest rate hiking since early-2014, as well as a broad multi-year stagnation in the South African economy to near-zero growth by the 1st half of 2016.

Given that the housing market tends to be more “leading” in nature in the business cycle, relative to the broader economy, the recent slowdown in month-on-month house price growth does point to the possibility that the economy has been turning weaker once more after a brief improvement back in the 2nd quarter. This is backed up by a recent dip in the Manufacturing Purchasing Managers Index (PMI), also a good leading business cycle indicator.

FNB expects average house price growth to hover around low-single digits in the near term, which would translate into a decline in real terms (when adjusted for CPI inflation), with little likely support from a very weak economy.

Read more here: Fnb-Property-Barometer_Sep_2016-House-Price-Index_3_Oct_2016