While they still point to a very well balanced market, FNB’s valuers perceive a mild decline in residential demand recently.
And while they still perceive residential supply to be constrained, maintaining a good market balance, the demand weakening has just recently started to lead to a decline in the Valuers’ Market Strength Index (MSI), the index which reflects the balance between residential demand and supply.
Market Strength: Valuers recently seeing demand slow
According to FNB’s valuers as a group, demand strength has started to weaken in recent months. The level of the Residential Demand Rating remains relatively solid at 51.24 on a scale of 0 to 100 in December. However, this is slightly down from a multi-year high of 51.32 reached in September 2015. While that does not reflect a meaningful deterioration to date, it points at least to a halt to further strengthening.
However, as yet the valuers as a group don’t see an increase in supply. To the contrary, the Residential Supply Rating continued to decline up until December. Supply constraints have been widely reported in the residential market over the past few years, and have been a key driver of the good market balance.
In addition, the Supply Rating remains lower than the Demand Rating, translating into a Market Strength Index (MSI) still above the crucial 50 in December. Above a 50 level in Market Strength implies demand still being stronger than supply in the eyes of FNB’s valuers as a group.
The recent mild weakening in the level of the MSI is thus not caused by rising supply but rather by a decline in the Residential Demand Rating. From a multi-year high of 56.12 as at June 2015, the Residential Demand Rating has declined mildly to 55.47.
Examining the MSI’s rate of change on a year-on-year basis, there has been a steadily slowing growth rate, from 3.7% in May 2015 to 1.6% by December, after a short and mild increase in the months prior to May 2015. That slight rise in year-on-year growth back before May 2015, we believe, has been feeding through into house price inflation in the second half of 2015, in the form of a “mini-surge” in year-on-year increase in the FNB House Price Index.
However, the post-May resumption in the trend of year-on-year decline in the MSI suggests that house price inflation should soon begin to slow once more.
Where the recent slowing in the Residential Demand Rating becomes more noticeable is when viewed on a month-on-month seasonally-adjusted basis.
Here, we see the rate of change in the MSI having slowed to a -0.06% decline from a +0.21% “high” in growth in July 2015. Noticeable here is the month-on-month decline in the Residential Demand Rating. While the Residential Supply Rating remains in decline, its rate of decline has slowed a little from -0.35% in September 2015 to -0.18% in December, pointing to the possibility that in the coming months the supply constraints may begin to become less acute.
In short, therefore, the FNB’s valuers as a group don’t yet see supply factors as contributing to a mild weakening of the market balance. Rather, they perceive a weakening demand side to be doing the “cooling”. Fairly soon, however, one would think that weakening demand would translate into a rising Supply Rating, should it continue.