FNB House Price Index’s mini-growth uptick in January appears to be peaking, with month-on-month growth having lost considerable momentum reports John Loos, household and property sector strategist for FNB Home Loans.
- The FNB House Price Index showed a year-on-year increase of 6.8% in January 2016, slightly higher than a revised 6.7% for the previous month. This rate is very similar to the past four months’ inflation rates, suggesting that year-on-year price growth is in a peaking phase.
- The month-on-month house price inflation rate has been slowing for the past four months, from a 0.9% high in September 2015 to 0.4% by January 2016, indicating loss of growth momentum which should translate into lower year-on-year house price inflation in the near term.
- FNB’s Valuers, as a group, appear to provide support for the expectation of slower house price growth, with the FNB Valuers’ Market Strength Index (MSI) having begun to decline mildly in recent months, on the back of slowing residential demand and the start of improving residential supply.
- We forecast an average house price inflation rate of 4.8% for 2016, slower than the 6% recorded for 2015.
- Our expectation of slower house price growth in 2016 is not only about what FNB’s Valuers tell us regarding slowing demand. It also has to do with the expectation that real economic growth will slow further from near 1.5% in 2015 to 0.5% this year. Depressed export commodity markets, along with a severe drought, are key to this slower growth forecast, as are rising interest rates.
- We expect further gradual interest rate hiking through 2016, to a level where prime rate ultimately peaks at 11.25%, from a current level of 10.25%.
The FNB House Price Index for January 2016 rose by 6.8% year-on-year. This is marginally higher than the revised 6.7% for December. With the prior months of October and November’s revised rates little different at 6.9% and 6.8% respectively, this appears to put year-on-year house price growth in a “peaking” phase, after an earlier mild rise from an April 2015 low of 5%.
In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth slowed to 1.4% in December, from a revised 1.9% in November, the slowing being caused by a rise in CPI inflation, from 4.8% in November to 5.2% in December (January CPI data not yet available).
Examining the longer term real house price trends (house prices adjusted for CPI inflation), the average real price currently remains 70.5% above the January 2001 level, exactly 15 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore still regard current real price levels as very high.
While the small 2015 year-on-year house price inflation acceleration appears to have more-or-less reached its peak, on a month-on-month seasonally adjusted basis (a better way to look at recent growth momentum), the rate of increase has already been slowing since October 2015, which should translate into slower year-on-year price increases fairly soon.
FNB’s valuers, in their FNB Valuers Market Strength Index (MSI), appear to provide support for the expectation of a near term slowing in house price inflation.
The Valuers’ Residential Demand Rating was at a level of 54.99 in January (scale 0 to 100), while the Supply Rating was at a lesser 53.27. This translates into an MSI of 50.86, with the level of above 50 implying that residential demand is still stronger than supply. However, the Residential Demand Index has been in decline since July 2015, the Supply Strength Index in positive growth territory since December 2015, translating into an MSI decline since October 2015. In short, the valuers, on average still perceive a well-balanced residential market, but as of late perceive Market Strength to have begun to deteriorate slightly.
Therefore, we expect slower average house price growth in the near term. However, our expectations are based on more than just the recent month-on-month house price inflation slowing or the MSI starting to weaken. It also reflects weak economic fundamentals.
After a Real GDP (Gross Domestic Product) growth rate believed to have been not far from 1.5% in 2015, the FNB forecast is for slower growth of 0.5% in 2016. The further expected slowing in growth is on the back of ongoing global commodity price weakness, gradually rising interest rates, and of course the major drought currently ravaging the agriculture sector.
In 2017, slightly better growth of 1.2% is projected on the assumption that the drought passes on and agricultural output returns to normal. However, this projected growth rate remains very weak.
The current environment of high social tensions and fragile labour relations, which can periodically be disruptive to economic output, but is unpredictable, places a significant downside risk to the growth forecast, however.
CPI inflation is projected to rise from 4.6% average in 2015 to 6.1% average for 2016, on the back of a now weaker Rand, and higher food price inflation as the drought impact is felt. The SARB is expected to continue to lift rates slowly, with Prime Rate peaking at 11.25% in the 1st half of 2017. Much, though, will depend on the Rand’s fortunes and its potential inflationary impact.
Under these economic conditions, and their negative impact on household income growth, the forecast is for average house price growth to slow from 6% average in 2015 to a 4.8% average in 2016, and a still slower 3.8% in 2017. While still positive in nominal terms, these projected rates would be below CPI inflation, translating into negative growth in real terms. Such negative real house price growth would reflect both higher interest rates along with ongoing weakness in economic growth, employment and household income growth.
The rental market could begin to mildly outpace the slowing home buying market through the forecast period, in turn leading to rising yields on residential property.