Property market slowly picks up steam

May average house price rate of increase slightly faster, Western Cape bucks the trend, records double digit growth

IN MAY, the FNB House Price Index recorded a 7.4 percent year on year rate of increase, which is slightly faster than the 7 percent revised rate recorded for April, implying an acceleration in nominal house price growth for the past 4 months using the latest revised data the prior month.

In real terms, when adjusting for CPI inflation, however, the rate of house price growth remains not too far from the zero level, having recorded 0.7 percent real year on year growth in April, slightly up from 0.3 percent in the prior month.

Higher nominal house price inflation may be partly the lagged effect of a shift to a higher economy-wide inflation environment since a year ago. However, it may also reflect a slightly better economic environment in the second quarter of this year, after a dismal start to the year in the first quarter. Furthermore, we believe that the national house price growth average receives strong support from the Western Cape region, which has bucked the slowing trend recently observed in other provinces to record double-digit house price growth early this year.

The return to slightly positive real growth in recent months was the result not only of rising average house price growth, but also due to some receding in CPI inflation, from 7 percent year on year in February to 6.2 percent by April (May CPI data not yet available).

Just above 0 percent real house price inflation would continue to suggest a market still very well balanced between supply and demand. While demand has not been spectacular since the 2008/9 recession, supply constraints have been reported widely, and building levels of new homes have remained muted, contributing to the market balance.

The average price of homes transacted in April was R1.075m.

Examining the longer term real house price trends (house prices adjusted for CPI inflation), we see that the level as at April this year was +5.3 percent up on the October 2011 postrecession low. However, the average real house price level remains – 18.2 percent below the all time high reached in December 2007 at the back end of the residential boom period.

Looking back further though, the average real price remains 67.4 percent above the January 2001 level, just over 15 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore regard real price levels as high.

In nominal terms, when not adjusting for CPI inflation, the average house price last year was 298.8 percent above the January 2001 level. There are three possible key drivers of this perhaps surprising mild acceleration in average house price growth, at a time when interest rates have been rising.

First, it is possible that some of this rise is the lagged impact of a higher general inflation environment which has set in in SA of late. After a low of 3.9 percent year on year in February 2015, CPI inflation gradually made its way higher through much of last year, to reach 7 percent in February this year. It is possible that higher house price inflation is in part reflective of a higher general inflation environment.

Second, however, the acceleration may also be due to a slightly better economic environment setting in during the second quarter of this year, after a dismal starting quarter of the year. Viewing FNB House Price Index growth on a month- on- month seasonally adjusted basis, we see that in recent years the dips in the month- on- month rate of change in the house price index more or less coincided with noticeable dips in the manufacturing purchasing managers index (PMI – one of the key up to date indicators of short term economic movements).

Recently, however, in the past two months’ data – in March and April – we saw the PMI shooting up back to above the crucial 50 level, suggesting some possible mild economic improvement. Such improvement may also be reflected in the rise in month- on- month house price growth.

Third, however, we believe that a key contributor in holding up the national house price index growth rate is the strong recent performance of the Western Cape region’s housing market. A lot of positive sentiment exists in this region, the country’s second largest economic and residential property region after Gauteng, and along with a significant land constraint this has boosted the province’s house price growth into double-digits.

The FNB Western Cape House Price Index recorded 12 percent year on year growth during the first quarter – FNB only produces the provincial indices on a quarterly basis.

By comparison, the other major regions were significantly slower. Eastern Cape Province recorded 7.6 percent year on year house price inflation in the first quarter, KZN 5.6 percent, Gauteng rose 3 percent, and the smaller five provinces a mere 1.7 percent.

It would, therefore, appear to be very much a Western Cape story in recent times.

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