Still a well-balanced market, but recession risk high – FNB
It’s still a well-balanced market, but there are more strong indications of near term economic weakening on the way, with recession risk high reports FNB Home Loans household and property sector strategist John Loos in his latest FNB Property Barometer.
November data related to the “Residential Property Economy” was something of a mixed bag, pointing to, on the one hand a still solid and well-balanced residential market, but on the other hand signs of more severe economic weakness (with a high risk of recession) at hand in the near term.
In recent months, we have seen year-on-year house price inflation rising from a low point of 5% in April to 7.2% by November. Around this period, our estimates of property transactions volumes by individuals (natural persons) have also experienced a growth “bump”, with registrations in the Deeds Office accelerating from negative year-on-year growth rates of near -10% early in 2015 to positive levels slightly above +10% by around mid-year.
FNB’s Valuers had signaled the possibility of such a mid-year “bump” in transaction growth and house price inflation, having reported a mild month-on-month strengthening in growth in their FNB Valuers Demand Rating around the 2nd quarter of 2015.
We believe the recent “Bump” to be the lagged response to economic developments late in 2014 and early this year. Around that time, we had a very brief but noticeable improvement in economic growth. From 1.4% year-on-year in the final quarter of 2014, real GDP growth “jumped” to 2.2% in the 1st quarter of 2015. That short-lived strengthening in economic growth, caused a minor jump in real disposable income growth too, and we believe this is what caused a mild strengthening in residential demand towards mid-year. Coupled with significant supply constraints, even a relatively minor demand improvement can see house price inflation rise, and this is what we got.
But various November data suggested that we are moving beyond “The Bump”, with the Residential Market set to go back into slowing growth mode. The FNB Valuers Market Strength Index, which measures the difference between their Demand and Supply Rating Indices, still showed mild strengthening. But it is the pace of that strengthening that has been slowing, and on a month-on-month basis they have begun to perceive a decline in demand recently.
The various economic data released during November suggest that, in the currently “rational” residential market, slowdown in residential demand should probably be the case. Real year-on-year GDP growth slowed to a poor 1% in the 3rd quarter, and both the SARB and OECD Leading Indicators for South Africa have picked up downward speed in their year-on-year rates of decline, suggesting more economic weakening to come in the near term.
The real shocker was November’s Manufacturing Purchasing Managers’ Index (PMI), which dropped to its lowest level in about six years, pointing to significant contraction in output to come in the country’s relatively large Manufacturing Sector. With the global economy remaining mediocre, and various commodity prices low, it is difficult to see anything other than contraction for the export-driven sectors such as Mining and Manufacturing, and this has to ultimately be felt, albeit in watered down version if we are lucky, by the rest of the economy.
Considerable leads and lags are a feature in this economy. So for the time being the Household Sector appears only to have got as far as experiencing mounting “financial limits”, imposed on it by slowing income growth in a slowing growth economy. This is perhaps reflected in broadly slowing retail sales growth, most notably in the “leading” Vehicle retail Sector, but in September’s data also in a mildly slower “Mainstream Retail” growth rate.
But the Household Sector doesn’t yet appear to have got to the next stage which is “financial stress”. Insolvencies data for September, continued to show significant year-on-year decline.
With a lack of financial stress to date, perhaps it isn’t surprising that the Residential Market continues to look in fairly good shape as it still proceeds through “the bump”. The level of house price inflation experienced in recent months remains positive in real terms, helped by a low CPI inflation rate, and the key monthly affordability indicators, namely Real House Prices and the Price-Rent Ratio continue to deteriorate (i.e. rise).
With interest rates rising, a third affordability ratio, namely the Instalment Value on the Average Priced House/Average Rental Ratio also continues to rise. But this ratio remains relatively low, because despite interest rates having risen mildly since early-2014, they still remain near multi-decade lows.
And so we still await the renewed slowdown in the various forms of growth in the Residential market. Recession risk is high. With global commodity price weakness and thus low inflationary pressures continuing, we may be fortunate in that the SARB could continue to hike interest rates at only a snails’ pace, softening the landing. But it is probably unrealistic to expect the residential market to defy the strengthening forces of “Economic Gravity”.