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FNB valuers perceive residential demand to be slowing

The FNB House Price Index’s mini-growth uptick appears to be peaking, with month-on-month growth already losing momentum reports John Loos, FNB Home Loans household and property sector strategist.

In November 2015, the FNB House Price Index inflation rate continued its mild year-on-year growth uptick of recent months, following a prior gradual slowing rate dating back to early-2014. However, this mini-uptick appears to be peaking, with month-on-month house price growth already slowing.

The recent small acceleration in year-on-year house price growth appeared to be driven by a “temporary” uptick in economic performance around mid-year, but may also in part be explained by indications of significant constraints in residential supply. Supply constraints can mean that any slight fluctuation in residential demand could move residential price inflation quite easily.


The FNB House Price Index for November 2015 rose by 7.2% year-on-year. This is slightly up from a revised 7.1% for October, continuing the mild short term accelerating price growth move that has emerged in recent months. These recent months’ acceleration came after a prior gradual slowing trend that started back in early-2014, after house price growth had hit a multi-year high of 8.6% at the end of 2013.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth accelerated very slightly to 2.3% year-on-year in October (November CPI data not yet available), from 2.2% in the previous month, with CPI inflation at a lowly 4.7%.

The average price of homes transacted in November was R1,046,406 


Examining the longer term real house price trend (house prices adjusted for CPI inflation), we see that despite some rise in recent years, (+6.7% since the October 2011 low) the average real house price level remains -17.2% 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 currently remains 65.2% 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.

Real house price levels thus remain at “boom time” levels in our view, despite having lost some ground since the end of 2007.

In nominal terms, when not adjusting for CPI inflation, the average house price in November 2015 was 290.3% above the July 2000 level.


While the year-on-year house price inflation surge appears to be approaching its “mini-peak”, on a month-on-month seasonally adjusted basis (a better way to look at recent growth momentum), the growth rate has started to slow in October and November. From a 1.1% month-on-month high in September, the rate has declined to 0.8% by November.

The “mini-surge” in house price inflation around mid-2015 broadly coincided with a positive “bump” in the economy around that time. The Manufacturing Sector Purchasing Managers’ Index (PMI), one of the economy’s leading indicators, briefly rose to above 50 in May-July, signalling some expansion in this large and cyclical sector, and 3rd quarter GDP (Gross Domestic Product) turned slightly positive on a quarter-in-quarter basis.

More recently, however, the PMI has turned back down to below the critical 50 level, while the SARB’s Leading Business Cycle Indicator has also turned for the worse, suggesting a return to weaker economic times. The resumed slowing in month-on-month house price inflation may therefore merely be beginning to once again track the economy slower.


FNB’s valuers, in their FNB Valuers Market Strength Index (MSI) may in part explain the recent uptick in house price inflation.

Examining the Demand, Supply and MSI itself, which reflects the difference between Demand and Supply, we see a still very well balanced residential market.

The Valuers’ Residential Demand Rating was at a level of 55.8 in November (scale 0 to 100), while the Supply Rating was at a lesser 52.92. This translates into an MSI of 51.44, with the level of above 50 implying that residential demand is still stronger than supply. Positive real house price growth under these conditions is not surprising, therefore.

However, the rate of growth or decline in the indices is often more insightful. Examining the three indices on a year-on-year percentage change basis, we see that demand growth has been slowing steadily since early-2014. From early-to-mid-2015, however, this demand growth moved more or less sideways, while the Valuers perceived the pace of decline in residential supply to speed up. The net result was a slight rise (strengthening) in the MSI up to about mid-year.

On a month-on-month rate of change basis, one also sees significant fluctuations, with a mild 2nd quarter Demand and MSI uptick, along with supply decline.

It is likely that the recent uptick in the year-on-year house price growth rate is the lagged impact of that MSI strengthening about a quarter earlier.

The Valuers, however, seem to suggest that the MSI growth strengthening was short lived, with its year-on-year growth slowing once more, driven lower by slowing Demand growth.

This would suggest that the year-on-year house price growth uptick is likely to be short lived, turning down once more in the near term, in lagged response to a slowing pace of strengthening in the Residential Market.


We remain of the belief that the mild recent uptick in year-on-year house price growth will be short lived, and 2 months of slowing month-on-month house price growth, already, suggests that this will probably be the case.

There is very little to enthuse about economically, at present. Some key high frequency indicators released in November looked poor. In recent months, the Manufacturing PMI has returned to negative territory, new vehicle sales remain in sharp year-on-year decline, and electricity sales declined a further -3.8% year-on-year, now -7.2% down on a multi-year high reached in May 2011.

The SARB Leading Business Cycle Indicator for September, released in November, picked up downward momentum, declining year-on-year by -5.5%, the most rapid year-on-year decline since July 2009. And, of course, the SARB (Reserve Bank) raised interest rates mildly further during November.

With the risk of recession thus looming ever larger, there appears little to support average house price growth at currently positive real rates, as we head towards 2016. FNB’s Valuers already perceive Residential Demand to be slowing. A supply-constrained market, however, keeps a reasonable market balance for the time being.



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