The three middle-to-lower end area value bands showed some house price growth acceleration in the second quarter of 2018, while the higher end areas remained on a slowing growth path, all a reflection of a search for relative affordability amidst economic stagnation and rising living costs.
FNB Area Value Band House Price Index performances
FNB compiles five Area Value Band House Price Indices. These indices 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 = R2.354 million), the ‘Upper Income Area House Price Index‘ (Average Price = R1.273 million), the ‘Middle Income Area House Price Index‘ (Average Price = R895,168), the ‘Lower Middle Income Area House Price Index‘ (Average Price = R590,309), and the ‘Low Income Area House Price Index‘ (Average Price = R362,579)
The second quarter 2018 results showed further slowing in year-on-year house price growth in both the two high end segments, but some further strengthening in the three middle-to-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 16.9% for the second quarter. This is an acceleration on the prior quarter’s revised 15.8%.
As always, however, FNB must caution, about major potential distortions in this index. This index includes the social housing component, and new homes in this category 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. FNB are thus very careful as to how they interpret the results in this ‘Low Income Area Value Band‘, viewing it only for its price growth trends but not for price growth magnitudes.
Moving one value band up, however, to what FNB believes to be a segment whose data is relatively free of the above mentioned distortions, FNB sees support for the view that the lower end has in recent times been stronger than the higher end, with the ‘Lower-Middle Income Area Value Band‘’s year-on-year house price growth of 8.1% being the second strongest rate behind that of the ‘Low Income Area Value Band‘. This rate represents a slight further strengthening on the prior quarter’s revised 8.0% growth rate, and is noticeably faster than a 6.3% rate recorded at the end of 2016.
The next band higher, i.e. the ‘Middle Income Area Value Band‘, also showed a year-on-year growth acceleration to 5.5%, from 5.3% in the previous quarter.
However, the two higher area value bands continued to show slowing year-on-year growth, as well as being the two segments with the slowest year-on-year growth.
The growth in the ‘Upper Income Area‘ value band slowed from 5.3% year-on-year in the first quarter to 4.9% in the second quarter, while the weakest segment, the ‘Luxury Area Value Band‘, saw its growth slow from 4.7% year-on-year to 4.4%.
Therefore, off the highest growth base a few years ago, the ‘Luxury Area Value 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 second quarter of 2018.
Examining quarter-on-quarter house price growth, a better indicator of very recent growth momentum than the year-on-year rate, FNB sees a similar relative picture for the segments as at the second quarter of 2018.
The ‘Luxury Area Value Band‘’s quarter-on-quarter growth slowed slightly from 1.05% in the first quarter of 2018 to 0.97% in the second quarter, while the ‘Upper Income Area Value Band‘ slowed from 1.17% to 1.12% over the same two quarters.
By comparison, the ‘Middle Income Area Value Band‘ saw acceleration from 1.42% to 1.46%, the ‘Lower-Middle Income Area Value Band‘ from 1.86% to 2.03% and the ‘Low Income Area Value Band’ from 4.08% to 4.18% from the first to the second quarter of this year.
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 R1 million, with the ‘Higher End Areas‘ still slowing.
Second quarter data updates appear to suggest that the ‘Luxury‘ and ‘Upper Income Area Value Bands‘ are still “depressed” relative to the three lower segments whose average price is below R1 million.
In these weak economic times, with Real Gross Domestic Product growth of a mere 0.75% in the first quarter of 2018, FNB would expect a financially constrained household sector to continue to search for relative affordability in greater numbers, which plays into the hands of the lower end of the market.
Not only is the stagnant economy constraining real disposable income growth, but an ongoing variety of tax rate increases lift the cost of living too. These include ongoing personal tax increases, which are structured to impact more heavily on higher income groups, and a 2018 VAT increase. Municipal rates and utilities tariffs continue to increase at above CPI inflation, raising home operating costs and making especially the larger and more expensive homes significantly more costly to own and run.
And then there is the recent series of fuel levy increases, which impact more heavily on the private transport-dependent higher income groups. Indeed, of late it is the higher income/expenditure groups whose CPI inflation rates are the highest.
A broad shift in a portion of demand towards more affordable areas, and smaller and more affordable homes whose running costs are lower, should thus be expected in these times of multi-year economic stagnation along with a rising cost of living.