Property Barometer – slowdown in FNB’s HPI rate of inflation picks up speed

Key Points:

• The FNB House Price Index for October 2016 rose by 2.4% year-on-year. This is a further slowing on the revised 3.5% rate recorded for September, and the 6th consecutive month of price growth slowing.
• The pace of slowdown in year-on-year house price growth has sped up in recent months. As recently as April, average house price growth was a significantly stronger 6.9%, so the slowdown in recent months has been significant.
• Examining house price growth on a month-on-month basis, FNB sees the onset of some deflation, to the tune of -0.44% in October.
• In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth has turned negative to the tune of -2.5% year-on-year in September (October CPI data not yet available), after a -1.1% decline in August.
• The average price of homes transacted in October was R1,053,925.
• The FNB Valuers’ Market Strength Index (MSI) remains above 50. However, the level has been declining as the Valuers Demand Rating drops.
• When FNB examined their 3rd quarter Major Region House Price Indices, they saw the smaller provinces (smaller from an economic point of view) showing the greatest weakness. Mining Sector weakness plays a significant role in parts of these smaller economic regions, and the FNB Mining Town House Price Index showed some mild house price deflation in the 3rd quarter. However, FNB suspects that the drought may also be playing a role via its negative impact on the Agriculture part of such economies.
• The significant pace of slowdown in year-on-year house price growth has meant that rental inflation has overtaken house price growth. This, in turn, has led to the onset of a decline in the House Price-Rent Ratio in recent months.

House Price Index Growth Slowdown Gathers Momentum – A Tale of Leads and Lags … and Perhaps, a Drought too

• FNB House Price Index continues its year-on-year growth slowing, but at a more rapid pace of late.

In recent months, the FNB House Price Index’s year-on-year growth rate has assumed a steeper downward trajectory, slowing to a mere 2.4%. This represents a significant slowing from a far more solid 6.92% in April of this year, just half a year, and is the slowest year-on-year price growth rate since October 2011. On a month-on-month seasonally-adjusted basis, the rate of change has moved into deflation to the tune of-0.44%.

Adjusting house price inflation with CPI (Consumer Price Index) inflation to get to a Real Rate of Change, the rate had turned negative to the tune of -2.5% year-on-year by September (October CPI inflation not yet available).

None of it makes for impressive reading, but it was not unrealistic to expect such a slowing, given the extent of economic weakness prevalent in South Africa in recent years. Interest rates have been rising, and although only 200 basis points in magnitude over more than 2 years, rate hiking is always bound to take “the edge” off such a heavily credit-dependent market as the housing market. And then there’s the economy itself, whose growth is battling to stay above zero, having experienced a multi-year growth slowdown starting back around 2012. The country’s myriad of structural constraints, most notably a highly unequal skills, and thus income, distribution, has meant that once the limits of fiscal and interest rate stimulus neared, growth would most likely stagnate. The situation has not been helped by a global economy with key problems of its own, notably a massive debt burden.

Global economic weakness has translated into weakness in demand and prices for SA’s export commodities in recent years, having a depressing impact on domestic Mining and Manufacturing.

• But why the “sudden” steepening in the slop of slowing price growth?

But why the sudden recent acceleration in the downward trajectory in house price growth? Most likely, the answer lies merely in so-called “leads and lags”. Certain events take place, and some parts of the economy or a market only respond a good while later. For instance, a few years ago, FNB saw the highly interest rate-sensitive new motor vehicle retail sales responding to interest rate hiking as well as a slowing economy, declining sharply. But only in recent months has South Africa suddenly started to see “mainstream” retail sales test the zero growth level, having slowed from a still-respectable 3.7% year-on-year in May 2016 to a lowly 0.2% in August.

Why such leads and lags? One potential reason is because while economic growth has broadly slowed over a few years, the onset of employment loss on a national basis, a key driver of household confidence as well as income, has only begun to pick up speed more recently. In the 2nd quarter of 2016, total estimated employment showed its 1st quarter of year-on-year decline since 2010, to the tune of -0.7%. It takes a considerable period of weak economic growth before this translates into employment decline.

It goes further, however. Our FNB Estate Agent Survey Activity Rating started to show slowing year-on-year growth late in 2014. This turned negative in 2015 and stayed negative in 2016. Growth in the volume of transactions also saw slowing over a similar period, because, like motor vehicles, residential demand growth is also sensitive to interest rates, being a heavily credit-dependent market. But even with slowing demand growth, and then an all-out decline in demand, it take a considerable time before supply constraints from the stronger market years are eliminated, and only then does one start to see seller pricing power and the market balance weaken more noticeably.

Indeed, the FNB Estate Agent Survey has begun to point to this. After 2 years of more-or-less sideways movement in the average time of properties on the market around the 11-12 week level, through 2014 and 2015, suddenly FNB saw a rise in this estimate from 11 weeks and 1 day in the 1st quarter 2016 FNB Estate Agent Survey to 14 weeks by the 3rd quarter. So, well before this more noticeable slowing in average house price growth we were reporting on softening in other of our housing market indicators, but there is often a considerable lag between when activity in the market slows until when price growth slows more significantly.

• Is the drought also having an impact more recently too?

Perhaps the latest negative economic factor is also starting to play a role too, however. FNB is referring to the severe drought affecting a large part of the country. Whereas the global economic slowdown began to translate into softening commodity prices, key to SA exports, back around 2011, the drought conditions are more recent. FNB poses the question as to whether the drought is beginning to play a role because of the regions that appear to be the weakest in terms of house price growth in recent times?

The house price growth slowdown has become broad-based, having started back in 2012/13 in the likes of KZN and Gauteng. More recently, though, FNB has seen the “Smaller 5” Provinces (smaller in terms of economic size – Limpopo, Mpumalanga, North West, Northern Cape and Free State) House Price Index year-on-year growth rate slow to a mere 0.8%, while the Eastern Cape (the smallest economy of the Major 4 Provinces) saw house price growth of only 0.1% in the 3rd quarter of 2016.

These smaller size economic regions are more heavily dependent on Agriculture, and their very weak house price growth performance, especially since 2015, leads us to suspect that weak Agriculture output is having a negative impact on their housing markets. It isn’t just about actual Agriculture output. Droughts can severely impact on the sentiment of such regions, even the sentiment of those with purchasing power.

However, its is difficult at this stage to evaluate the impact of the drought, because certain regions within the smaller 5 provinces have a large exposure to the Mining Sector too, a sector under major pressure in recent years.

The FNB Mining Towns House Price Index, compiled from Deeds data, so not quite comparable with their national monthly index, shows a 3rd quarter 2016 move to average house price decline of -1.8% year-on-year. This is somewhat weaker than the +4% growth in our Major Metro Index which was done on the same methodology. It is possible that the larger big city and provincial economies, being more diversified, can escape with less weakness through economic downturns. But they don’t escape altogether, and while the Big 3 Provinces house price growth rates were better than the smaller provinces in the 3rd quarter, they too were slowing.

The list of “economic negatives” has been a lengthy one in recent years, and more recently they appear to have been catching up with, and constraining, the consumer and the residential market after a considerable lag.

Read more here: FNB Property Barometer October 2016 House Price Index November 2016

Please click here to view the FNB blog, where the related video, podcast and soundbite can be downloaded.