While the lower priced (average price = R364,937) area value bands have remained the segments with the strongest average house price growth in Q1 2018 according to FNB, the fact is their price indices are showing slowing quarter-on-quarter growth. The Middle (average price = R895,089) and Upper Income (average price = R1,251m) area value bands have started to see accelerating quarter-on-quarter growth momentum. This suggests that the lower end “superiority” may be starting to fade.
But is this plausible? “Possibly,” says FNB’s household and property sector analyst, John Loos. “At some point stronger house price growth in traditionally more affordable suburbs leads to their becoming less affordable, and their ‘value for money’ attractiveness diminishing relative to more expensive suburbs.
“In addition, sentiment in South Africa early in 2018 seems improved, interest rates are declining mildly, and leading economic indicators have been pointing towards a strengthening economy. This could lead to that search for relative affordability of recent years, that benefited the lower end.”
Luxury Area House Price Index (Average Price = R2,358m)
Upper Income Area House Price Index (Average Price = R1,251m)
Middle Income Area House Price Index (Average Price = R895,089)
Lower Middle Income Area House Price Index (Average Price = R577,587)
Low Income Area House Price Index (Average Price = R364,937)
The Low Income Area House Price Index was the strongest performer in terms of year-on-year house price growth, recording 13.9% year-on-year for Q1 2018.
“As always, however, we must caution about major potential distortions in this index,” said Loos, noting the index included the subsidised housing and new homes which are not sold to their new owners, and are often registered at a value with the deeds office which does not reflect any market value. “Over the years, there have also been periodic sell-offs of rental stock by councils which have not necessarily taken place at market value. Such distortions mean that in a repeat sales index for Low Income Areas, many homes prices come off a very low base not reflective of market values, and show major price inflation when resold at market value at a later stage. We are thus very careful as to how we interpret the results in this Low Income Area Value Band.”
The Lower-Middle Income Area Value Band’s year-on-year house price growth of 7.6% is second strongest behind the Low Income Area Value Band.
“However, this 7.6% rate is very slightly lower than the prior quarter’s 7.7%, suggesting that this segment may have been ‘peaking’ recently after a relatively solid period,” said Loos.
The Middle Income Area Value Band went from 4.9% in Q4 2017 to 5%, and the Upper Income Area Value Band from 5.4% to 5.5% over the same two quarters.
The Luxury Area Value Band, however, continued its year-on-year growth slowdown, from 5.2% in Q4 2017 to record the weakest year-on-year growth of all 5 segments – a rate of 4.9%.
“Therefore, off the highest growth base a few years ago, the Luxury Area Value Band’s rate has slowed the most significantly of all 5 value bands since around 2014, to reach the slowest rate of all the segments by Q1 2018,” said Loos, noting that the house price growth momentum at the higher end may be just starting to stabilise and even “turn the corner” towards some strengthening. “On a quarter-on-quarter basis, a better indicator of recent price growth momentum than the year-on-year calculation, we have seen a near-levelling out in the growth rate of the Luxury Area Value band, slowing only very slightly from 1.16% in the previous quarter to 1.15% in Q1 2018.”