Res­i­den­tial mar­ket re­mains well bal­anced

Prices are in­creas­ing but this will prob­a­bly turn out to be a short-term phe­nom­e­non

Weekend Argus (Saturday Edition) - - PROPERTY - JOHN LOOS

LAST month, the FNB House Price In­dex in­fla­tion rate con­tin­ued its mild uptick of re­cent months, fol­low­ing a prior grad­ual slow­ing rate dat­ing back to early last year.

This may come as some­thing of a sur­prise in what re­mains a very weak econ­omy, but may be in part ex­plained by in­di­ca­tions of sig­nif­i­cant con­straints in res­i­den­tial sup­ply, which could mean that any slight fluc­tu­a­tion in res­i­den­tial de­mand could move res­i­den­tial price in­fla­tion quite eas­ily.

The FNB House Price In­dex for Oc­to­ber rose by 7.7 per­cent year-on-year. This is up from a re­vised 7.2 per­cent for Septem­ber, con­tin­u­ing the mild ac­cel­er­at­ing price growth trend that has emerged in re­cent months af­ter a prior grad­ual slow­ing trend that started back early last year, af­ter house price growth had hit a mul­ti­year high of 8.6 per­cent at the end of 2013.

In real terms, when ad­just­ing for Con­sumer Price In­dex ( CPI) in­fla­tion, the rate of house price growth ac­cel­er­ated to 2.5 per­cent year-on-year in Septem­ber (Oc­to­ber CPI data not yet avail­able), with CPI in­fla­tion of only 4.6 per­cent in that month.

This Septem­ber real house price in­fla­tion rate was also up on the prior month’s re­vised 1.9 per­cent. The av­er­age price of homes trans­acted last month was R1 043 592.

Ex­am­in­ing the longer-term real house price trend (house prices ad­justed for CPI in­fla­tion), we see that de­spite some rise in re­cent years, (+6.3 per­cent since the Oc­to­ber 2011 low) the av­er­age real house price level re­mains - 17.5 per­cent be­low the all-time high reached in De­cem­ber 2007 at the back end of the res­i­den­tial boom pe­riod.

Look­ing back longer though, the av­er­age real price re­mains 64.6 per­cent above the July 2000 level, the date when the in­dex started, and a time back just be­fore boom- time price in­fla­tion started to ac­cel­er­ate rapidly.

Con­strained

not ad­just­ing for CPI in­fla­tion, the av­er­age house price last month was 289.2 per­cent above the July 2000 level.

Ac­cord­ing to FNB’s valuers as a group, the res­i­den­tial mar­ket re­mains very well bal­anced, with de­mand still stronger than sup­ply, so it should not be too sur­pris­ing to see con­tin­ued real house price growth from this point of view, de­spite our ex­pec­ta­tion that a weak econ­omy should ul­ti­mately cause this mar­ket bal­ance to de­te­ri­o­rate.

The valuers also ap­pear to sug­gest that con­strained sup­ply is at the heart of sus­tain­ing pos­i­tive real house price growth.

The level of the res­i­den­tial de­mand rat­ing re­mains rel­a­tively solid at 55.81 on a scale of 0 to 100 last month.

Si­mul­ta­ne­ously, the valuers as a group rate sup­ply at a lower level of 53.06.

With the sup­ply rat­ing be­ing lower than the de­mand rat­ing, this trans­lates into a mar­ket strength in­dex (MSI) above the cru­cial 50 level at a 51.3 read­ing for last month.

Above a 50 level in mar­ket strength im­plies de­mand still be­ing stronger than sup­ply in the eyes of FNB’s valuers as a group.

Ex­am­in­ing the MSI’s yearon-year growth rates, we see slow­ing year-on-year growth in the res­i­den­tial de­mand rat­ing, but neg­a­tive year- on- year growth in the res­i­den­tial sup­ply rat­ing still trans­lates into pos­i­tive year-on-year in­crease in the over­all MSI.

How­ever, this does not ap­pear to ex­plain the re­cent ac­cel­er­a­tion in real house price growth, be­cause the rate of in­crease in the mar­ket strength in­dex has been slow­ing of late.

Rather, what seems to be the case is that we may be see­ing the lagged im­pact of a slight ac­cel­er­a­tion in the year- onyear rate of in­crease in the MSI back around the sec­ond quar- ter of this year, be­fore the more re­cent re­newed slow­ing. Back in the sec­ond quar­ter, de­mand growth tem­po­rar­ily stopped slow­ing, and the MSI’s growth rose slightly.

This the­ory is per­haps sup­ported by ex­am­in­ing the month- on- month per­cent­age change (sea­son­ally ad­justed) in the FNB House Price In­dex. This rate of­ten shows short­term fluc­tu­a­tions that ap­pear to co­in­cide with move­ments in cer­tain key high fre­quency eco­nomic in­di­ca­tors, the all-im­por­tant manufacturing pur­chas­ing man­agers’ in­dex ( PMI) be­ing a key one.

A brief surge in the PMI in the sec­ond quar­ter back to above the 50 level (50 be­ing the di­vid­ing line be­tween ex­pan­sion and con­trac­tion), was ac­com­pa­nied by a surge in month- on- month growth in house prices.

So, an ap­par­ently briefly bet­ter (though far from won­der­ful) eco­nomic pe­riod in the sec­ond quar­ter, com­pared to the eco­nomic con­trac­tion in the first quar­ter of this year, may have briefly turned the res­i­den­tial mar­ket slightly stronger, and the lagged (de­layed) im­pact of that may be seen in the more re­cent rise in year-on-year house price in­fla­tion.

The lead­ing in­di­ca­tor for South Africa (OECD ver­sion), too, showed a “less neg­a­tive” year-on-year de­cline (reach­ing zero by April) around the sec­ond quar­ter of this year, be­fore turn­ing worse once more in the third quar­ter.

So, there were some hints of a slightly less neg­a­tive eco­nomic sit­u­a­tion around the sec­ond quar­ter, and this may have just been enough to cause a lagged ac­cel­er­a­tion in house price growth shortly there­after. The sub­se­quent de­te­ri­o­ra­tion in such in­di­ca­tors sug­gest, how­ever, that it may not last long.

The fur­ther mild uptick in av­er­age house price growth in last month’s data may ap­pear some­what out of place, given many in­di­ca­tions of a very weak and broadly stag­nat­ing econ­omy.

Cer­tainly, given the mul­ti­year broad de­te­ri­o­ra­tion in South Africa’s eco­nomic growth, and the like­li­hood of this de­te­ri­o­rat­ing trend con­tin­u­ing, we would not fore­see an uptick in house price growth con­tin­u­ing for any great length of time.

Rather, we be­lieve it could be driven by very short eco­nomic fluc­tu­a­tions. It could thus be the re­sult of a slightly and tem­po­rar­ily bet­ter econ­omy in the sec­ond quar­ter of this year, com­pared to the con­trac­tion of the first quar­ter, cou­pled with a still-con­strained res­i­den­tial sup­ply, feed­ing though into year-on-year house price growth with a lag.

● John Loos is the house­hold and prop­erty sec­tor strate­gist at FNB Home Loans.

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