September 2014 house price index growth rate slows again

Posted On Wednesday, 01 October 2014 10:18 Published by
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September 2014 House Price Index growth rate slows again, but a "re-acceleration" of sorts may be near

John Loos

The FNB House Price Index has seen a slowing year-on-year growth once again in September. However, other FNB housing market indicators suggest the possibility that a renewed price growth acceleration may not be far away.

According to the FNB House Price Index, the average house price for September 2014 rose 5.5% year-on-year. This is slower than the previous month's revised 5.9%, and represents the 9th consecutive month of gradually slowing price inflation since the 8.5% year-on-year rate recorded in December 2014.

Real house price growth (i.e. when house prices are adjusted for consumer price inflation), turned slightly negative to the tune of -0.45% year-on-year in August (September CPI not yet available). This represents a slight slowing from a revised 0.14% real price growth rate in July, with CPI inflation recording 6.4% in August.

The average price of homes transacted in September was R952,655. But the FNB valuers market strength index suggests that house price growth may once again start to accelerate soon The FNB Valuers' Market Strength Index points to an increasingly well balanced residential market.

The Valuers as a group continue to perceive a rise in demand along with deteriorating supply, the perfect recipe for an improving balance between demand and supply. The index scale is zero to 100, and a level of 50 indicates a balanced market, with the Residential Demand Rating equaling the Residential Supply Rating. Significantly, therefore, in September the Market Strength Index rating rose to slightly above that key 50 level for the 1st time since August 2008.

While the Market Strength Index has been improving for a few years, it did, however, see its pace of growth slowing early in 2014, which appeared to be in line with slowing house price growth. It was conceivable at the time that the slowing pace of improvement was the residential market's mild response to a "surprise" 50 basis point interest rate hike by the SARB (Reserve Bank), along with a contracting economy in the 1st quarter of the year.

More recently, however, the Index's growth appears to have once again begun to turn towards strengthening. The month-on-month seasonally adjusted growth rate has seen acceleration in September for the 4th consecutive month, the result of renewed seasonally adjusted acceleration in residential demand since May, along with a renewed acceleration in the deterioration in perceived residential supply.

The direction of growth in the FNB Valuers Market Strength Index usually correlates reasonably well with the direction of house price growth, often with some lead or lag. This renewed growth acceleration could therefore suggest that some renewed house price growth acceleration is not far off.

Therefore, after some tapering, more rapid year-on-year house price growth may once again not be far away, if the FNB Market Strength Index and the month-on-month price growth trends are anything to go by.

However, while the renewed acceleration in growth in both our FNB Valuers Market Strength Index points to the possibility of some renewed acceleration in year-on-year house price growth in the near term, in a rational residential market our expectations should probably remain moderate in the near term.

From its very strong year-on-year rate of near to 6% back in 2010, Real Household Sector Disposable Income growth has settled near to 2% in recent quarters, receiving little support from a stagnant economy with a real year-on-year growth rate of around 1% in the 2nd quarter of 2014.

In addition, the Household Sector Debt-Service Ratio (The cost of servicing the Household Sector debt burden, interest only, expressed as a percentage of Household Sector Disposable Income), although still very low, has begun to rise mildly with the advent of the interest rate hiking cycle earlier this year, and this normally constrains growth in Household Sector borrowing.

Furthermore, we remain of the belief that the SARB will continue on its path of gradual "normalization" of interest rates, "normalization" meaning raising the Repo Rate back up to positive real level (i.e. above inflation). This, translates into a forecast for Prime Rate ending 2015 at 10.25%, one percentage point higher than its current rate.

Therefore, while our current average house price growth forecast of 7.3% may still be achievable should we indeed get some "re-acceleration" in year-on-year house price growth in the remainder of 2014, we would still expect a slower average price growth rate in 2015 on the expectation of renewed rate hiking.

The key "downside risk" to the residential property market at present comes from South Africa's huge macroeconomic imbalance. In the absence of economic policy measures to boost the production side of the economy, the country's export growth potential remains limited, while it remains heavily dependent on imports. Therefore, we remain stuck in a situation where Gross Domestic Expenditure far exceeds National Income, translating into a huge current account deficit of 6.6% of GDP.

Interest rates remain inappropriately low when it comes to containing this excess, and so we rely heavily on net foreign capital inflows to fund this deficit. Since 2011, such capital inflows have been insufficient, precipitating a multi-year slide in the Rand to very "cheap" levels already.

And in the absence of any sign of resolution of the current account deficit problem to date, The risk remains high of further Rand slide, and the need for a more significant interest rate hiking cycle to curb the potential imported inflationary pressures that can result from such a slide.

Such a risk must be seen as significant. The upside risk to our market expectations comes from the potential for "exuberance" that may be out of line with weak economic fundamentals. To this end we continue to monitor our "Alternative Real Prime Rate" for signs of a "speculators paradise" developing.

Price booms can begin to drive speculative activity and buyer panic (where buyers rush to get into the market fearing that if they don't do it now it will be un-affordable later) on a large scale, and thus can lead to "market overshoots.

We thus see it as beneficial to the health of the market when the SARB sets interest rates at levels where home mortgage lending rates are positive in real terms according to our alternative house price-adjusted real interest rate calculation. Instead of converting Prime Rate from a nominal to a real rate using CPI, we instead use the FNB House Price Index.

When this version of Real Prime Rate is significantly negative (as it was back around 2004/5), i.e. where house price inflation exceeds the Prime Rate percentage, it can imply a favourable environment for short term speculation in residential property.

Currently, our alternative Real Prime Rate is positive and rising, at +3.8% in September, up from a previous month's revised 3.3%, gradually rising as interest rates are hiked and house price inflation slows. This mild rise is seen as a further welcome development in order to promote a "rational" residential market.

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