FNB compiles five ‘Area Value Band House Price Indices‘ which group areas according to their average home transaction values, using deeds data, and include all cities and towns in South Africa.
The five indices are the ‘Luxury Area House Price Index‘ (Average Price = R2.358 million), the ‘Upper Income Area House Price Index‘ (Average Price = R1.251 million), the ‘Middle Income Area House Price Index‘ (Average Price = R895,089), the ‘Lower Middle Income Area House Price Index‘ (Average Price = R577,587), and the ‘Low Income Area House Price Index‘ (Average Price = R364,937)
The first quarter 2018 results show no strong pattern of slowing year-on-year house price growth in both the two high end segments any longer, nor do they show clear further strengthening in both the lower end segments.
The ‘Low Income Area House Price Index’ was again the strongest performer in terms of year-on-year house price growth, recording 13.9% year-on-year for the first quarter. This is an acceleration on the prior quarter’s revised 13.7%.
FNB must caution about major potential distortions in this index. This index includes the subsidized housing component, and new homes in this category, which are not sold to their new owners, and are often registered at a value with the deeds office which does not reflect any market value. Over the years, there have also been periodic sell-offs of rental stock by councils which have not necessarily taken place at market value. Such distortions mean that in a repeat sales index for Low Income Areas, many homes prices come of a very low base not reflective of market values, and show major price inflation when resold at market value at a later stage. Thus, FNB is very careful as to how they interpret the results in this Low Income Area Value Band.
Moving one value band up, however, FNB sees more reliable support for the view that the lower end has recently been showing strength relative to the higher end, with the Lower-Middle Income Area Value Band’s year-on-year house price growth of 7.6% being the second strongest rate behind that of the Low Income Area Value Band. However, this 7.6% rate is very slightly lower than the prior quarter’s 7.7%, suggesting that this segment may have been “peaking” recently after a relatively solid period.
In two of the three area value bands above this, year-on-year house price growth accelerated slightly in the first quarter of 2018, the Middle Income Area Value Band from 4.9% in the fourth quarter of 2017 to 5%, and the Upper Income Area Value Band from 5.4% to 5.5% over the same two quarters.
However, the Luxury Area Value Band continued its year-on-year growth slowdown, from 5.2% in the prior quarter, to record the weakest year-on-year growth of all five segments, a rate of 4.9%.
Therefore, off the highest growth base a few years ago, the Luxury Area Valua Band’s rate has slowed the most significantly of all five value bands since around 2014, to reach the slowest rate of all the segments by the first quarter of 2018.
However, the house price growth momentum at the higher end may be just starting to stabilize and even “turn the corner” towards some strengthening.
On a quarter-on-quarter basis, a better indicator of recent price growth momentum than the year-on-year calculation, FNB has seen a near-levelling out in the growth rate of the Luxury Area Value band, slowing only very slightly from 1.16% in the previous quarter to 1.15% in the first quarter of 2018.
Meanwhile, the Upper Income Area House Price Index showed its fourth consecutive quarter of quarter-on-quarter growth acceleration, from 1.39% previous to 1.42% in the first quarter of 2018, while the Middle Income Area Value band saw a third consecutive quarter of acceleration from 1.23% previous to 1.31% in the first quarter of this year.
By comparison, the three low end segments both showed stronger quarter-on-quarter price growth rates early in 2018 but both showed slowing rates of growth. The Lower Middle Income Area Value Band’s quarter-on-quarter growth slowed from 1.81% previous to 1.61% in the first quarter, the 2nd consecutive quarter of slowing, while the Low Income Area House Price Index saw its rate slowing from 3.4% previous to 3.3%, also the second consecutive quarter of slowing.
This quarter-on-quarter price growth analysis, in short, still points to superior price growth performance at the lower-priced end of the market where average prices are well-below R1m, but suggests that the magnitude of lower end “out performance” relative to higher end areas may diminish in the near term.
In conclusion, whilst the lower priced area value bands have remained the segments with the strongest average house price growth in the first quarter of 2018, the fact that their price indices are showing slowing quarter-on-quarter growth, while the Middle and Upper Income Area Value bands have started to see accelerating quarter-on-quarter growth momentum, suggests that the lower end “superiority” may be starting to fade.
Is this plausible? Possibly. At some point stronger house price growth in traditionally more affordable suburbs leads to their becoming less affordable, and their “value for money” attractiveness diminishing relative to more expensive suburbs. In addition, sentiment in South Africa early in 2018 seems improved, interest rates are declining mildly, and leading economic indicators have been pointing towards a strengthening economy. This could lead to that search for relative affordability of recent years, that benefited the lower end more, just diminishing in strength somewhat.