2018’s house price growth could prove to be stronger than 2017

In 2017, the FNB House Price Index grew by 3.7%, a slowing on 2016’s figures and the third consecutive year of slowing annual average price growth. FNB expected a slower house price growth rate for 2017, with the country’s economic growth performance ‘stagnating’ for some previous years. 

Pointing to a stronger 2018. monthly house price growth has been accelerating recently with leading economic indicators suggesting that house price growth could receive more support from the economy this year, compared to last year.

2017 FNB House Price Index performance

2017 was the third consecutive year of national average house price growth slowdown. From a multi-year high of 7% (which was reached in 2014), the FNB House Price Index’s average annual growth slowed each year, to 4.8% in 2016 and then to a further 3.7% in 2017.

Based on eleven months’ worth of CPI inflation data, this translates into an estimated decline of -2.4% in real terms (adjusting house price growth for consumer price inflation).

The last three annual slowdowns appear easy to explain, with multi-year slowing in annual economic growth rates (a mere 0.7% real economic growth believed to have taken place in 2017) having taken place, and a mild 200 basis points’ worth of interest rate hiking having taken place between early-2014 and early-2016, cooling the market slightly too. At the beginning of 2017, FNB projected a 3% average house price growth for 2017.

December FNB House Price Index findings

However, the FNB House Price Index performance has shown a gradual year-on-year growth, strengthening as the year progressed, having hit ‘rock bottom‘ growth in late 2016.

From a low of 1.5% year-on-year house price growth in December 2016, the rate gradually rose to reach 6.1% in December 2017, further up from a revised 5.5% rate for November 2017.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, house price deflation that had occurred earlier in the year gradually dissipated, and by November FNB saw a slightly positive year-on-year real house price growth rate of 0.8%, house price growth moderately exceeding CPI (Consumer Price Index) inflation (December CPI data is not yet available).

The average price of homes transacted in December was R1,126,224.

When examining house price growth on a month-on-month seasonally-adjusted basis, a better indicator of very recent price growth momentum than year-on-year rates, FNB saw an early-2016 high, followed by a dip around mid-year, and then very recently an acceleration in the revised month-on-month growth rates right at the end of the year, with December 2017 closing at 0.72% month-on-month growth.

The prior dip in month-on-month house price growth did coincide broadly with a dip in another key leading economic indicator, i.e. the Manufacturing Purchasing Managers’ Index, and in recent months the latter indicator has also been moving higher, both perhaps pointing to signs of a slightly stronger economy going into 2018.

What to expect in 2018?

After three years of slowing annual average house price growth, FNB believes that 2018 could see a slightly stronger growth rate but they would caution against expecting too much. From an average house price growth rate of 3.7% last year, FNB projected the 2018 average to shift a little higher to near 5%.

This is not a major improvement, but it stems from expectations of marginal economic growth improvement in 2018, from an estimated 0.7% last year to 1.2%, and one lone interest rate hike only late in 2018 not expected to have a significant dampening effect.

The SARB Leading Business Cycle Indicator does appear supportive of mildly better economic growth in the near term, having risen in recent months.

But predictions are never without risks. Much will depend on the political and government policy environment, though, with 2018 being the run-up to the 2019 general election. Uncertainty around policy direction makes forecasting even tougher than it would be under conditions of greater certainty, posing significant risks to forecasts. Widely publicized ratings agency downgrades for the country, should they occur, can quite easily dampen national sentiment, and this can easily feed into a housing market either directly, or indirectly via the economic impact.

In addition, drought conditions, notably in the Western Cape region, can impact on regional economies which feeds into those regions’ housing markets, so much will depend on weather patterns in certain parts of the country this year, especially in the Western Cape which is one of the country’s prime property markets.

Read more here: FNB Property Barometer – December FNB House Price Index – 11 January 2018