What the crystal ball says is in store for us

Solid building activity and completions growth in 2015 expected to be the residential market highlight

A MORE noticeable growth rate in the level of new residential building completions is expected to be the highlight in the residential property-related numbers in 2015.

Economic events look set to be more positive in 2015, compared with 2014, with the drop in global oil and food prices looking set to drive consumer price inflation sharply lower and household real disposable income growth higher.

These events, in turn, are expected to lead to further resi dential proper t y market s t rengthening and mildly higher house price inflation this year. But our forecast of a strong increase in residential building completions will have little to do with further residential demand strengthening in 2015, and more to do with prior years’ demand growth and the steady build up of existing home supply constraints over the past three years.

Therefore, after not showing much growth in recent years, we believe that the time has come for the residential development sector to supply new stock to the market at a significantly faster rate, and as such forecast square metres of residential completions to grow by 21.6 percent this year.

The general mood in the residential property industry is positive. The market has shown a nice solid performance since 2012. Rising demand has gradually mopped up excess supply, and a noticeably increasing percentage of estate agents participating in the FNB Estate Agent Survey have been pointing to shortages in residential units for sale.

This improving balance between supply and demand has, in turn, driven some positive house price inflation in real terms over the past three years (Positive real referring to where house price inflation exceeds consumer price inflation). And looking forward into 2015, we have seen extremely positive developments for the global and local economy, in the form of a massive oil price drop, and to a lesser degree a food price drop. The spectacular oil price fall emanates from major global investment in oil and shale gas.

These price drops, along

Price drops

coming months

with a rand that has recently behaved reasonably well, promise to drive consumer price inflation down nearer to 4 percent in the coming months we believe, f rom November’s 5.8 percent.

The FNB interest rate fore- cast is for the South African Reserve Bank to lift its policy repo rate gradually higher from the current 5.75 percent to 6.5 percent by year-end, taking the prime rate from 9.25 percent to 10 percent. The reasoning behind pencilling in this mild rate hiking at a time when inflation looks set to fall through the floor comes from the SARB’s signalled desire to “normalise” rates gradually upward from what are believed to be “abnormally” low levels by SA standards.

However, as things stand, the interest rate forecast risks lie clearly to the downside, and the probability of further rate hiking being postponed by the SARB to a later date must now be quite high. Nevertheless, even should the bank lift rates slightly this year, the positive impact of lower inflation in not only boosting economic growth, but also in translating into higher real disposable income growth, is expected to sustain further growth in housing demand.

Therefore, from an esti- mated 1.5 percent in 2014, we forecast an acceleration to 2.5 percent in real disposable income growth this year, as real economic growth accelerated from an estimated 1.5 percent in 2014 to 2.3 percent.

Forecast risks are probably evenly balanced at this stage, when it comes to economic and disposable income growth. The upside risks emanate from the strong possibility that we underestimate the positive stimulus to arise from this positive oil price shock. Forecasters are inclined to underestimate the impact of strong negative as well as positive shocks, and this oil price slump is big enough to be classified as a shock.

The downside risks to the growth forecasts, however, remain the same two as highlighted previously – questions over SA’s electricity supply reliability and capability, as well as the ability of labour relations to hold up better than in 2014.

For the time being, though, it all appears to look more positive than back in the first half of 2014, when strike action dis- rupted output significantly.

The expectation of stronger real household disposable income growth in 2015, compared with 2014, leads to a forecast of further increase in residential demand. However, we would expect the pace of demand growth to perhaps be slower than in 2014 should the SARB indeed persist with interest rate normalisation. The reasoning behind a slower rate of growth in demand is the expectation of a mild deterioration in residential affordability as our average house price growth forecast moves up a notch from 7.2 percent in 2014 to 8.7 percent for 2015. This rate we expect to exceed average employee remuneration, forecast at a lowly 5.3 percent for 2015, by a significant margin.

There are two relevant affordability measures here. The first is the average house price/average employee remuneration index. The second measure is the instalment payment value on a new 100 percent bond on the average priced house/average employee remu- neration ratio index. Both of these affordability measures began to show some deterioration (rise) in 2014. The former index is forecast to rise (deteriorate) 3.3 percent in 2015, and the latter is projected to rise (deteriorate) at a faster 7.3 percent, based on our house price, employee remuneration and interest rate forecasts.

However, 2015 may start to lay the platform for slowing affordability deterioration thereafter. This is because we expect the highlight of 2015 to be a more noticeable surge in levels of residential building completions, with a forecast growth rate in the region of 21.6 percent in the number of square metres of residential building completions for the year.

The FNB-BER Residential Contractors Building Confidence Index jumped from 58 to 69 (scale of 0 to 100) in the final quarter, continuing a steadily rising trend, and third quarter 2014 square metres of residential building plans passed surged to 19.2 percent year-onyear growth.

Although this growth may sound extreme to some, 2015 building completion levels would be 39.5 percent below the boom time peak of 2007, and after some years of very low levels of building activity, finally we believe that the time has come for more meaningful growth.

Therefore, although we forecast further strengthening in certain other residential property numbers, including a mild increase in house price inflation, a slight further decline in the average time of homes on the market, and a further rise in the FNB Market Strength Index, we believe that the 2015 highlight will prove to be a notable strengthening in the level of newly built residential units coming on to the market.

This, in turn, is forecast to lead to some easing in residential supply constraints come 2016, resulting in slowing annual house price growth as we move into 2016 and beyond.

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