Average house price growth surprised on the downside in the first quarter of 2018

Western Cape down from 10.9% in the second quarter of 2016 to 1.5% at present

– John Loos

In March 2018 the FNB House Price Index grew by a slower 1%, year on year, down from a revised 2.7% in February, and from 2017’s high of 5.1% reached in November.

This implies a weak start to 2018, despite indications of improved national sentiment and an improved economy early in the year.

However, one key additional constraint on the national house price growth rate of late has been the normalisation of house price growth in the Western Cape. Not long ago, that province’s relatively strong house price growth was a boost to the national average price growth. Of late, however, its rate has become pedestrian like the rest.

From a 2017 revised high of 5.1%, reached in November, the FNB House Price Index’s year on year growth rate has slowed once more to 1% by March 2018, a further slowing on February’s revised rate of 2.7%.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, year on year house price deflation of -1.3% was recorded in February (March CPI data not yet available), with CPI inflation in that month measuring 4.0% year on year, compared to house price growth of a lesser 2.7%.

The average price of homes transacted in March was R1 097 034.

This implies a weak start to 2018, with year on year house price growth for the first quarter of 2018 recording a mere 2.6%, down from 5% in the final quarter of 2017.

The slowing year on year price growth trend seemingly goes against recent indications of improvement in national sentiment. While we still await first quarter consumer confidence survey numbers, the RMB-BER Business Confidence Index has already pointed to some moderate strengthening in the first quarter of 2018, while the country’s composite leading business cycle indicators have also been on the rise in recent times, pointing to near term economic improvement. Such economic improvement should ultimately spill over into improved household disposable income growth, which in turn can boost housing demand and housing market strength.

We remain of the belief that such a national market strengthening, albeit a mild one, will still materialise in 2018, but there can be a lag time between when residential demand starts to pick up until when year on year house price growth starts to strengthen, and that lag is perhaps what we are still seeing in the first quarter of 2018.

There is, however, a second factor in play here, and this is the Western Cape region, which has defied national trends in recent years to record far stronger house price growth than any other major region. This, until not long ago was a boost for the national average house price growth rate. This boost, however, has steadily fallen away, with the FNB Western Cape House Price Index having slowed to a lowly 1.5% year on year growth for the first quarter, now below the national average house price growth rate of 2.6% for the first quarter of 2018.

Given that the Western Cape is the second largest housing market by value, a slowdown in its house price growth all the way from 10.9% in the second quarter of 2016 to 1.5% in the first quarter of this year makes a major difference to the province’s impact on the national average.

The slowing in the Western Cape’s house price growth is no surprise, with the region’s home values having become relatively unaffordable in recent years, severely restricting the pace of new entrants to its market, and possibly even giving affluent semigrants from other regions in SA second thoughts of late. The province’s severe drought may also be starting to play a cooling role on its economy as well as on its housing market.

The Western Cape’s slowing house price growth has not yet coincided with an expected strengthening in house price growth in Gauteng. We have been more upbeat about housing market strength to come in Gauteng, the country’s largest market, but as yet have not seen this translate into any house price growth acceleration. The FNB Gauteng House Price Index still showed slow year on year growth of 1.4% in the first quarter of this year.

And so we await some lift for the national housing market from improved national sentiment and economic performance. The Firstrand economic growth forecast for 2018 is 1.8%, mildly higher than 2017’s recorded 1.3%, and of course we have had an isolated 25 basis point interest rate cut in March by the SARB, a move which may boost home buyer confidence mildly.

But while we wait, the country’s real house price correction continues, with house price growth remaining below general inflation as measured by the CPI (Consumer Price Index). In real terms (adjusted for CPI), the FNB House Price Index has declined by -6.1% since December 2015, after some prior mild recovery from 2009 to 2014/15. This 2016/17 real price decline was on the back of a very weak economic growth rate in recent years, along with the lagged impact of interest rate hiking from early-2014 to early-2016.

Viewing the longer term picture, the index is down by -20.9% since the end of 2007, which marked the final stages of SA’s pre-2008 housing bubble.

The real index remains high by its historic standards, however, still 61.4% up on January 2001, a date just before boom time house prices began to skyrocket.

John Loos is the household and property sector strategist at FNB Home Loans.