Property Insights – October Consumer Price Index and Property

The October Consumer Price Index showed a slight acceleration in its year-on-year rate from 4.9% in the previous month to 5.1%. This remains within the South African Reserve Bank’s 3-6% target range, but now being nearer to the higher end of this target range, the speculation regarding tomorrow’s South African Reserve Bank interest rate decision ranges between ‘hike’ and ‘unchanged’ rates, Firstrand is expecting a 25 basis point interest rate hike.

The key contributor to this mild acceleration in the Consumer Price Index inflation rate was the recent sharp rise in domestic fuel prices, brought on by an oil price surge up to early-October. This caused a larger contribution to overall Consumer Price Index from the Transport Consumer Price Index.

Potential implications for the property market

But what do Consumer Price Index numbers in recent months say about property, or imply for property. Some would say that, given that it has much to do with higher petrol costs in recent months, homes nearer to major places of employment would become more sought after, in an attempt to lower commuter transport costs. FNB would doubt this, because these oil and petrol price surges are typically too short-lived to change people’s living and home buying decisions (essentially longer term decisions) significantly. What changes people location decisions over the longer term is the gradually mounting traffic congestion challenge in South Africa’s major cities, as opposed to short run fuel price spikes.

But a real potential short term implication emanates from a possible interest rate hike, should recent Consumer Price Index readings lead to this. The weak economy of recent years has already caused real property values (“real” referring to property values adjusted for general inflation, either using the Consumer Price Index or Gross Domestic Product measures of inflation) to go into decline for some time now, and here FNB refers to both residential and commercial property. Should the October Consumer Price Index reading lead to a rate hike, FNB would expect property demand to remain weak in this economic environment, and for real property values to remain in decline.

What the Consumer Price Index says about the property market – rental market weakness, bad for landlords but good for interest rates

The property market itself is a key positive contributor in terms of keeping Consumer Price Index inflation within the 3-6% target range. And here FNB refers specifically to the residential rental part of the property market. The Actual Rental and Owner Equivalent Housing Rental Consumer Price Index Sub-Indices carry a large weighting of 16.84% of the total Consumer Price Index together. This is almost as big as the Food and Non-Alcoholic Beverages Consumer Price Index’s weighting of 17.24%, and a weak Residential Rental Market in recent times has contributed to the low CPI/low interest rate cause.

The Consumer Price Index for Actual Rentals showed inflation of 4.03% (last surveyed in September Consumer Price Index), having slowed in recent surveys, and the Owner Equivalent Rental Consumer Price Index an even slower 3.66%.

Utilities tariffs and municipal rates remain troublesome

However, the overall Housing Consumer Price Index inflation rate remains mildly “troublesome” for the Overall Consumer Price Index inflation rate, recording an October rate of 5.2% due to ongoing strong inflation in Municipal Rates and Utilities Tariffs, which are components of the housing Consumer Price Index, being costs directly related to owning or renting a house.

Municipal Rates and Non-Electricity Utilities Tariffs (“Water and Other Services” Consumer Price Index) are most troublesome, recording year-on-year inflation of 11.1%. The Consumer Price Index for Electricity and Other Fuels showed 7.73% year-on-year inflation, also well above overall Consumer Price Index inflation.

By comparison, the Consumer Price Index for Home Maintenance is better behaved at 3.1% year-on-year. It is possible that this latter Consumer Price Index component reflects the Home Maintenance Industry being partly “crowded out” by ongoing sharp cost increases for homeowners emanating from Municipal Rates and Tariffs.

The long term trend of Municipal Rates and Tariffs inflation far outstripping general inflation raises the affordability challenges for tenants and owners, incentivizing a shift to alternative sources of power to Eskom, while also incentivizing better use of property/space.

Smaller is better in the housing rental market

So finally, perhaps not surprising is that the Consumer Price Index figures also point to “smaller being better” in terms of home rentals, the flat rental and townhouse rental Consumer Price Indexes continuing to outperform the  “Houses” Consumer Price Index, the latter being on average the largest category and the most costly to run. The Flats Rental Consumer Price Index inflated by 4.7% year-on-year in October, The Townhouses Consumer Price Index by a similar 4.8%, and the House Consumer Price Index by a noticeably lesser 3.5%.

Since January 2008, just over a decade, the Flats Consumer Price Index has inflated cumulatively by 90%, Townhouses by 75.9% and Houses by 62.6%.

Read more here: Property Insights – Consumer Price Index and Property – 21st of November 2018