This is according to FNB household and property sector strategist, John Loos, who said the significant pace of slowdown in year-on-year house price growth has meant that rental inflation has overtaken house price growth.
“This, in turn, has led to the onset of a decline in the house price-rent ratio in recent months,” he said. “When we examined our Q3 2016 major region house price indices, we saw the smaller provinces (smaller from an economic point of view) showing the greatest weakness.
“Mining sector weakness plays a significant role in parts of these smaller economic regions, and our FNB Mining Town House Price Index showed some mild house price deflation in Q3. However, we suspect that the drought may also be playing a role via its negative impact on the agricultural parts of such economies.”
Eastern Cape a whisker from 0% growth
FNB reports that house price growth slowdown has become broad-based after starting in 2012/13 in KZN and Gauteng. More recently, however, the smaller five provinces (in terms of economic size) – Limpopo, Mpumalanga, North West, Northern Cape and Free State – have seen their year-on-year house price growth slow to 0.8%, while the Eastern Cape (the smallest economy of the major four provinces: Gauteng, KZN, Western Cape) saw house price growth of only 0.1% in Q3 2016.
“These smaller-sized economic regions are more heavily dependent on agriculture, and their very weak house price growth performance, especially since 2015, leads us to suspect that weak agricultural output is having a negative impact on their housing markets,” said Loos. “It isn’t just about actual agricultural output; droughts can severely impact on the sentiment of such regions, even the sentiment of those with purchasing power.
“However, it is difficult at this stage to evaluate the impact of the drought, because certain regions within the smaller five provinces have a large exposure to the mining sector too – a sector under major pressure in recent years.”
According to the FNB Mining Towns House Price Index, compiled from deeds office data, shows a Q3 2016 move to average house price decline of -1.8% year-on-year; compared with +4% growth in FNB’s Major Metro Index which was done using the same methodology.
“It is possible that the larger big city and provincial economies, being more diversified, can escape with less weakness through economic downturns,” said Loos. “But they don’t escape altogether, and while the big three provinces’ (Gauteng, KZN, Western Cape) house price growth rates were better than the smaller provinces in Q3, they too were slowing.
“The list of ‘economic negatives’ has been a lengthy one in recent years, and more recently they appear to have been catching up with, and constraining, the consumer and the residential market after a considerable lag.”
The average price of homes transacted in October was R1,053,925.
Watch the full video here