July 2018 saw the FNB House Price Index growing by a faster 4.1%, year-on-year, up from the previous month’s revised 4.0%, and from a February 2018 revised low of 2.8%. This is the fifth consecutive month of house price growth acceleration. However, signals from the FNB Estate Agent Survey and FNB’s Valuers suggest that a loss of price growth momentum is approaching.
FNB House Price Index results for July 2018
On a year-on-year basis, the FNB House Price Index’s growth rate continued to accelerate mildly in July 2018, reaching 4.1%, up from a revised 4.0% in June, and the fifth consecutive month of growth acceleration since the revised 2.8% low point reached in February.
However, while the growth accelerates mildly in nominal terms, price growth remains negative in “real” terms, when adjusting for Consumer Price Index inflation. This in effect means that the gradual housing market price “correction” continues, a slow real price decline that has been in place for most of the time since early-2016.
But while real house prices have only been in decline since 2016, the signs of market growth slowdown can be traced even further back to 2014, where real price growth peaked at +2.4% year-on-year in May 2014, and where-after a broad growth slowdown commenced on the back of interest rate hiking at the time, along with a broad economic growth stagnation from around 2012.
As at June 2018 (July Consumer Price Inflation not yet available) real house prices declined year-on-year by -0.5%, with Consumer Price inflation at 4.6% in that month and house price growth at 4.0%.
Month-on-month house price growth starts to lose steam again
In order to better evaluate recent house price growth momentum, FNB examines month-on-month house price growth on a seasonally-adjusted basis. Month-on-month growth direction leads year-on-year growth direction, and here FNB has already seen two consecutive months of month-on-month house price growth slowdown.
From a high of 0.66% month-on-month growth in May, this rate has slowed to 0.48% as at July 2018
FNB valuers perceive a recent return to broader market slowing trend
FNB’s valuers have been indicating that a mild housing demand strengthening took place late in 2017. This briefly curbed supply growth, according to the valuers, and translated into a slight increase in the FNB Valuers’ Market Strength Index late in 2017 and very early in 2018.
With something of a lag, this appears to explain the short uptick in nominal house price growth more recently.
However, the valuers have more recently begun to report weakening home demand, the seasonally-adjusted FNB residential demand rating declining by -0.08% in July 2018, and significant growth in the FNB housing supply rating, to the tune of +0.46% at the same time. This translates into a July 2018 month-on-month decline of -0.29% in the FNB market strength index, the market strength index reflecting the balance between supply and demand.
In addition, July 2018 was the first month since May 2014 that the FNB market strength index dipped below 50, to 49.9, which means that the valuers now rate residential supply as slightly stronger than demand.
The broader multi-year weakening in the FNB market strength index began after a multi-year high of 51.8 reached in September 2015.
FNB Estate Agent Survey also indicates a recent return to broader market slowing trend
The FNB Estate Agent Survey provides support to the FNB Valuers’ perceptions of a resumption in the market weakening trend.
A resumption of a multi-year weakening trend was witnessed in the second Quarter 2018 FNB Estate Agent Survey, with agents reporting a significant drop in residential market activity in the May 2018 quarterly survey, after a “once-off” first quarter “spike”.
In the survey, FNB asks respondents to provide a rating of market activity in their areas, a subjective rating on a scale of 1 to 10. The first quarter 2018 FNB activity rating jumped noticeably from 5.29 in the previous quarter to 6.18, a jump that FNB believed to have been “Ramaphoria”-related, a reference to the change in Presidents in South Africa early this year. Even on a seasonally adjusted basis, the jump was the most noticeable in over three years, from 5.4 in the prior quarter to 5.79. But this first quarter 2018 uptick, like the slightly earlier FNB Valuers Market Strength Index uptick, was quickly reversed in the second quarter, the activity rating falling back sharply to 5.28 (5.37 on a seasonally adjusted basis).
The broad multi-year weakening trend in the Residential Activity Rating started in 2015.
Further support for the perception of a weakened housing market in the second quarter of 2018 was provided by a renewed lengthening in the estimated average time of homes on the market prior to sale, from fourteen weeks and one day in the prior quarter to sixteen weeks and four days in the second quarter, according to the Estate Agent Survey. A broad multi-year increase in the average time of homes on the market started in 2016.
What does all this mean for market transaction volumes?
The brief late-2017 market strengthening, according to the FNB Valuers, and the mild strengthening in house price growth early in 2018, appears to have been reflected in housing market transaction volumes late in 2017 and early-2018. Using deeds office property transfers by individuals below R10 million, which FNB believes will be residential-dominated, FNB saw a year-on-year growth acceleration in transaction volumes late in 2017, from negative territory to a positive +10% year-on-year growth rate in the final quarter of the year. The first quarter was slightly slower but still saw solid growth to the tune of 9%.
What could FNB possibly ascribe that brief late-2017/early-2018 relative market strength to? 2017 saw slightly better economic growth, assisted by the end of drought conditions in many parts of the country and a major surge in Agriculture production.
From a negative rate of -0.3% year-on-year in the first quarter of 2016, real Gross Domestic Product growth slowly recovered to 1.5% by the final quarter of 2017. This may have had some impact on the housing market strengthening in the summer 2017/18 quarters, along with a brief “Ramaphoria” bounce in sentiment after the major political leadership changes late in 2017 and early in 2018.
However, first quarter Gross Domestic Product growth receded to 0.75% year-on-year, and with it FNB’s valuers saw demand weaken once more, followed by agents seeing market activity decline in the second quarter of 2018.
The housing market outlook
While periodic fluctuations in economic growth could see transaction volumes growth turn positive from time to time, the consistently negative real house price growth since early-2016 leads FNB to believe that economic growth rates of 1%-1.5%, along with very little interest rate stimulus, are not sufficient to create the level of housing demand that can mop up oversupplies, balance the market and lead to positive real house price growth.
With several months’ worth of house price data available for 2018, it appears increasingly likely that average house price growth for the entire 2018 will come in slower than 2017’s 4.3%, and FNB now forecasts an average price growth of 3.5% for this year. This is based on a Gross Domestic Product forecast of 1.3% for 2018, which is unchanged from 2017. The Firstrand Economics team sees slightly faster economic growth in 2019, to the tune of 1.6%, translating into a slightly faster average house price forecast of 3.7%.
But given what FNB has said about economic growth being insufficient to balance the housing market better, the theme through our forecast period is one of low single-digit house price growth, under performing Consumer Price Inflation, which will translate into further real house price decline.