In June 2017, the FNB House Price Index showed further acceleration in year-on-year growth compared with revised May growth, and has now shown accelerating growth for six consecutive months.
However, the market remains weak at 3.6% house price growth, and adjusting for CPI inflation we saw a -2% rate in real terms for May. On a month-on-month basis, house price growth slowed again for the third consecutive month in June, pointing increasingly to a renewed “soft patch” emerging not only in the housing market but also in the economy.
June FNB House Price Index Findings
Mild data adjustments in June 2017 – FNB House Price Index
The FNB House Price Index is compiled from eighteen sub-segment average house price time series. In order to limit the impact of transaction volume shifts across segments, which can often create the impression of house price growth or decline where there is none, FNB virtually fixes the weightings of these sub-segments, based on their five-year average transaction volumes. The weightings are not entirely fixed though. Rather, FNB uses the five-year moving average of the sub-segments’ volumes to weight them, implying a very slow change in the weightings over time as the five-year moving averages of their transaction volumes gradually change.
In June, as part of FNB’s ongoing attempts to improve the quality of the House Price Index, FNB changed the five-year moving average methodology from a historic five-year moving average to a centralized five-year moving average. This has led to very small changes in the historic time series dating back to the year 2000.
June average house price growth
The FNB House Price Index for June 2017 rose by 3.6% year-on-year. This is a mild acceleration on the revised 3.3% rate of increase for May, and is the sixth consecutive month of mildly accelerating growth since the revised low of 1.7% year-on-year reached in December 2016.
In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth remained in negative territory, having recorded a -2.0% year-on-year decline in May (June CPI data not yet available), after a slightly -2.1% rate in the previous month.
This real price decline was largely due to the still-slow nominal house price inflation rate of 3.3% year-on-year in May, while CPI inflation for than month was 5.4%.
The average price of homes transacted in June was R1,102,190.
Month-on-month house price growth slowing may point to another economic weak period approaching
Examining house price growth on a month-on-month seasonally-adjusted basis (a better recent momentum indicator than the year-on-year calculation) suggests that a period of renewed economic weakness may once again be emerging after the first quarter of 2017 had shown certain signs that a slightly stronger economy may be approaching.
The Housing Market can often be a good leading indicator of economic conditions. Up until March 2017, FNB saw month-on-month seasonally-adjusted house price growth accelerate after a late-2016 dip. More recently, from April to June 2017, a renewed month-on-month house price growth slowing has been recorded.
The past four noticeable “dips” in the Manufacturing Purchasing Managers’ Index (PMI), also a useful leading indicator of broader economy direction, have broadly correlated with the timing of the seasonally adjusted month-on-month dips in house price growth, and it now remains to be seen whether this latest slowing in month-on-month house price growth (0.56% as at June, down from a March 0.88% high) will be accompanied by a further dip in the PMI.
FNB house growth in foreign currency terms
What house price growth are aspirant foreign buyers of domestic residential property seeing?
Given that the Rand has performed somewhat better of late compared to a year ago, the FNB House Price Index when converted into major foreign currency terms has recently shown very strong year-on-year rates of increase.
In June, the index showed a 21.4% year-on-year rise in US Dollar terms, and a 21.1% rise in Euro terms. In UK Pound terms, the rate was a far higher 34.6%, due to the additional impact of a significant Brexit-driven Pound weakening last year.
Longer term real house price performance
Real house price levels
Examining the longer term real house price trends (house prices adjusted for CPI inflation), FNB sees that the level as at May 2017 had lost -3.9% since a post-2008/9 recession high in December 2015.
Looking a bit further back to the all-time real house price peak at the end of 2017 (at the end of the pre-2008 housing boom period), on a cumulative basis real house prices were -19% down on that high as at May 2017.
However, looking back further, despite a mediocre performance in recent years, the average real price currently remains a massive 64.4% above the end-2000 level, around 16.5 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore still regard current real price levels as high by historic standards.
In nominal terms, when not adjusting for CPI inflation, the average house price in June 2017 was 317.9% above the end-2000 level. By comparison, consumer goods and services prices, as measured by the CPI, were only 153.2% higher over virtually the same period (up to May 2017 due to June CPI data not yet available).
The extent of house price deflation in the market
How prevalent is home re-sales price deflation?
Recently, FNB began to analyse house prices in order to view the magnitude of house price deflation vs inflation in the housing market. At any given time, there is always a certain amount of house price deflation within the overall market. By this, FNB means homes being resold at prices below that which they were previously purchased for.
In such times like the present when the market is weak and average house price inflation is low, it would be realistic perhaps to expect a higher percentage of homes being resold at deflated prices, and vice versa in stronger market times.
The causes of price deflation when reselling can vary:
- Genuine market price deflation can be the cause in weak economic or rising interest rate times, such as in 2008/9, or a specific area can fall from favour and even go into decay.
- A home may have originally been purchased at an “incorrectly” high price which was above the true market value at the time. Establishing the true market price is tough in a market where each home’s characteristics differs in some way from the next.
- Financial stress of the owner can lead to a deterioration in the property due to lack of maintenance and upkeep., or can cause a very hasty sale at below “market value”.
FNB uses deeds data for properties purchased and sold by individuals (“Natural persons”) for these estimates.
Recently, the incidence of re-sales price deflation remains moderate, and the overall incidence of such price deflation has not risen as a percentage of total sales.
In May, the estimated level of resale price deflation was 10.2% of total sales, which is not significantly different from 10.1% estimate as at the end of 2016, and far below that 23.4% “peak-of-crisis” level of September 2009.
However, delving a bit deeper, FNB may see some signs that seller “pricing power” is diminishing, which could imply some mild rise in the incidence of price deflation soon to come.
In order to do this, FNB smooths the individual price inflation/deflation “bands” that we have created, by using six-month moving averages.
Firstly, what FNB see sis that the percentage of homes being resold for “10% or more” above purchase price has begun to decline slightly, from a post-2008/9 recession high of 78.3% for the SIX months to August 2016 to 77.2% for the six months to May 2017.
So, while there is no noticeable rise in the incidence of price deflation yet, the rate of price inflation on home resales may to be starting to slow.
As the level of pricing power diminishes, there has been an increase in the estimated percentage of homes being resold at values nearer to their previous purchase price.
Homes resold at 5-10% above purchase price have seen a mild increase from 5.9% of total sales for the first six months of 2016 to 6.5% for the six months to May 2017.
Homes resold at 0-5% of original purchase price have risen from 5.3% of total sales for the six months to September 2016, to 6% for the six months to May 2017.
Then, there has been some increase in the incidence of price deflation in the “homes resold at 0-5% below purchase price” band. From 1.69% of total resales for the six months to July 2017, the percentage of homes falling into this deflation category has risen mildly to 2.1% of total sales.
However, in the category “homes resold at more than 5% below purchase price”, there has not yet been a noteworthy rise in the percentage of total resales. The estimated percentage for this category was 8.3% for the six-momths to May, slightly lower than the 8.7% for the first half of 2016 and 8.5% for the second half of 2016.
Therefore, while there has not yet been any noticeable rise in all out home resales deflation, FNB has seen a rise in the estimated percentages in those price inflation/deflation categories nearer to original purchase price level, and a decline in the estimated percentage of homes being resold at 10% or more than purchase price. This suggests that, while sellers as a group have been able to resist greater levels of overall resales price deflation (albeit by often having to leave their homes on the market for longer to achieve their price), their average “pricing power” appears to have weakened mildly.
Conclusion
From our June FNB House Price Index, FNB saw some acceleration in what remains a very weak year-on-year house price growth rate. However, in real terms the rate of change remains firmly negative, still pointing to a weak market that has shifted away from demand-supply equilibrium in recent times.
And slowing month-on-month growth suggests that the recent year-on-year acceleration may be short-lived.
Ongoing market weakness should not be surprising. Certain economic indicators, recently, have also pointed to weak sentiment returning to South Africa’s economy in the 2nd quarter on the back of a raft of widely publicized negative economic news, most notably certain country risk rating downgrades to so-called “junk status”.
FNB have seen the RMB-BER Business Confidence Index reach an 8-year low of 29 (scale of 0 to 100) in the second quarter of 2017, while the SARB and OECD Leading Business Cycle Indicators for South Africa have recently returned to month-on-month declines.
With the housing market very much reflective of what goes on in the economy, FNB continues to project a lowly 3% average house price growth rate for 2017 as a whole. For the first half of 2017, the average year-on-year rate was not far off that, measuring 2.8%.
Read more here: FNB Property Barometer – June House Price Index – 3rd July 2017
