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House prices slow as economic stagnation bites

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House prices slow as economic stagnation bites

01 Sep 2015

The FNB House Price Index inflation rate for August 2015 slowed mildly further, continuing a broad price growth slowdown that began in early 2014. 

Loos says the house price forecast risks lie very much to the downside of the recent forecast. “In a China ‘hard landing’ scenario, and a resultant domestic recession, the risk of house price deflation becomes very possible.”

“The further slowing is hardly surprising, coming on the back of ongoing economic stagnation with a rising risk of recession, and gradually rising interest rates,” says household and property sector strategist at FNB Home Loans, John Loos. 

The FNB House Price Index for August 2015 rose by 4.9% year-on-year, down from the revised 5.2% for July, continuing the broader slowing price inflation trend that started in early 2014, where house price growth had hit a multi-year high of 8.6% at the end of 2013. 

In real terms, when adjusting for CPI inflation, the rate of house price growth had slowed to 0.3% year-on-year in July (August CPI data not yet available), with rising CPI inflation of 5% only marginally lower than July house price inflation, says Loos. “It is likely that the real house price rate of change in August will come in at zero or even negative, given slowing house price inflation and rising CPI inflation.” 

The average price of homes transacted in August was R1 002 665, according to the report. 

“Until recently, the key drivers of the broad year-and-a-half slowing house price growth trend have emanated from the demand side of residential property, but more recently we may have seen signs that supply side factors are also just be beginning to play a role,” says Loos. 

He says they believe the key factors suppressing residential demand growth are firstly, the Reserve Bank began its gradual interest rate hiking cycle in January 2014, and has hiked by a total of 1 percentage point over the 1st year-and-a-half, the most recent 25 basis point hike being in July 2015. “While the small magnitude to date does not break the bank, it arguably leads to a little bit more caution in home buying, taking a bit away from residential demand.” 

Secondly, the economy continues its broad multi-year stagnation, causing GDP growth to slow, from a post-recession high of 3.2% in 2011, to 1.5% in 2014, and the indications are that 2015 may be even slower, he says. “This has slowed employment and wage bill growth; 2nd quarter 2015 GDP numbers were particularly bad, showing 1.2% year-on-year growth while contracting by -1.3% on a quarter-on-quarter annualised basis.” 

Thirdly, he points to recent quarters having seen a dramatic drop in consumer confidence levels. The FNB-BER Consumer Confidence Index dropped to a negative level of -15, the lowest level in 15 years. “This may not only be a function of a deteriorating economy, but also be driven by concerns over the longer term future of South Africa, given a raft of bad news relating to economic management and the conditions of state-owned enterprises, especially in the area of electricity supply.” 

On the supply-side, Loos says an acceleration in growth in residential buildings completed, to 31.9% year-on-year in the 2nd quarter, has the “potential to begin to alleviate residential supply constraints in certain areas” where they exist, should positive growth be sustained through the second half of the year. 

He says looking at the longer term real house price trend (house prices adjusted for CPI inflation), it is evident that despite some rise in recent years (+3.5% since the October 2011 low), the average real house price level remains -19.6% below the high reached in December 2007 at the back-end of the residential boom period. 

Going further back, the average real price remains 64.2% above the January 2001 level, just before boom-time price inflation started to accelerate rapidly, he says. 

“Real house price levels thus remain at ‘boom-time’ levels in our view, despite having lost some ground since the end of 2007,” says Loos. “In nominal terms, when not adjusting for CPI inflation, the average house price in July 2015 was 272.5% above the January 2001 level.” 

In terms of the outlook, Loos says the worse than expected 2nd quarter GDP figure, an alarming drop in the 2nd quarter FNB-BER Consumer Confidence Index, and recently a sharp month-on-month decline in the FNB Valuers Residential Demand Rating, suggests that “a recession has become a distinct possibility”. 

“Our most recent average house price growth forecast is 5.4% for 2015 as a whole, slowing to 4.2% in 2016,” says Loos. 

However, he notes those forecasts are based on low positive economic growth continuing in South Africa during 2015/2016. “This is an increasingly hazardous assumption to make as China’s economic cracks widen, and SA’s own structural constraints get seemingly worse.” 

Thus, Loos says the house price forecast risks lie very much to the downside of the recent forecast. “In a China ‘hard landing’ scenario, and a resultant domestic recession, the risk of house price deflation becomes very possible.” 

Author: John Loos - FNB household and property sector strategist

Submitted 08 Sep 15 / Views 2077