Brakes on as price growth slows for sixth month in a row

Examining house price growth on a month-on-month basis, we see the onset of some deflation, to the tune of -0.44% in October.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth turned negative to the tune of -2.5% year-on-year in September (October CPI data is not yet available), after a -1.1% decline in August.

It was not unrealistic to expect such a slowing, given the extent of economic weakness prevalent in South Africa in recent years such as:

Rising interest rates. Although only 2 percentage points over more than two years, rate hiking is always bound to take the edge off such a heavily credit-dependent market as the housing market.

The economy’s growth that is battling to stay above zero, having experienced a multi-year growth slowdown starting around 2012.

The country’s many structural constraints, most notably a highly unequal skills, and thus income, distribution, has meant that once the limits of fiscal and interest rate stimulus neared, growth would most likely stagnate.

A global economy with key problems of its own, notably a massive debt burden, has translated into weakness in demand and prices for South Africa’s export commodities in recent years, having a depressing impact on domestic mining and manufacturing.

But why the sudden recent accel- eration in the downward trajectory in house price growth, while the economy has been weakening for a few years, and interest rate hiking started back in 2014?

Most likely, the answer lies merely in so-called leads and lags.

Certain events take place and some parts of the economy or a market respond only a good while later.

One potential reason is because while economic growth has broadly slowed over a few years, the onset of employment loss on a national basis – a key driver of household confidence as well as income – has only begun to pick up speed more recently.

In the second quarter of 2016, total estimated employment showed its first quarter of year-on-year decline since 2010, to the tune of -0.7 percent.

It takes a considerable period of weak economic growth before this translates into employment decline. It goes further, however. Our FNB estate agent survey activity rating started to show slowing year-on-year growth late in 2014. This turned negative in 2015 and stayed negative in 2016.

Growth in the volume of transactions also saw slowing over a similar period, because residential demand growth is also sensitive to interest rates, being a heavily credit-dependent market.

But even with slowing demand growth, and then an all-out decline in demand, it takes considerable time before supply constraints from the stronger market years are eliminated and only then does one start to see seller pricing power and the market balance weaken more noticeably.

Indeed, our FNB estate agent survey has begun to point to this.

The average time properties stayed on the market:

Through 2014 and 2015: Around the 11 to 12-week level.

First quarter 2016: 11 weeks and one day.

Third Quarter 2016: 14 weeks. Perhaps the latest negative economic factor – the severe drought – is also starting to play a role.

When we examined our third quarter Major Region House Price Indices, we saw the smaller provinces (smaller from an economic point of view) showing the greatest weakness.

Mining sector weakness plays a significant role in parts of these smaller economic regions and our FNB Mining Town House Price Index showed some mild house price deflation in the third quarter. However, we suspect that the drought may also be playing a role via its negative impact on the agriculture part of such economies.

Finally, while it is possible the larger big city and provincial economies, being more diversified, can escape with less weakness through economic downturns, they don’t escape altogether. While house price growth rates in the big three provinces were better than the smaller provinces in the third quarter, they too were slowing.

John Loos is the household and property sector strategist at FNB Home Loans. This is an edited version of his original article.