Expected theme for 2019 is ongoing real property price correction

by John Loos

One of our expected property themes for 2019 is ongoing gradual real property price correction.

The FNB House Price Index continues to hover in low single digit growth territory not too far from 4% year on year. On a year on year basis, the Index’s growth rate accelerated slightly to 4.2% in November, from a slightly lower revised 4.1% rate in October.

The low single-digit growth in nominal terms continues to translate into a year on year price decline in “real” terms, when adjusting for CPI (consumer price index) inflation. This means that the gradual housing market price correction continues, as it has since early-2016.

As at October 2018 (November CPI not yet available) real house prices declined year on year by -0.9%, with CPI inflation at 5.1% and house price growth at 4.1% in that month.

Examining the longer run performance of the FNB House Price Index in real terms, we still see it at relatively high levels, 88.9 up on the January 2001 pre-boom index level, having risen sharply in that pre-2008 boom period.

The cumulative real decline since the peak of that pre-2008 boom period, reached in August 2007, has been -20.8%. We don’t, however, believe that this cumulative real price correction to date has been sufficient to bring real home values back into line with what are now very weak economic fundamentals.

FNB’s valuers continue to point to housing demand weakening, and with it the demand-supply balance as reflected in a declining FNB Valuers’ Market Strength Index.

This appears to explain the ongoing house price decline in real terms.

The FNB Residential Demand Rating declined by -1.2% on a year on year basis in November 2018.

The FNB Housing Supply Rating has been rising year on year, recording a +2.6% rate as at November.

These movements in demand and supply translate into a further decline in the FNB Market Strength Index by -2.1% year on year, to reach a reading of 49.61, keeping it below 50 for the sixth consecutive month. This below-50 reading means that valuers now rate residential supply as stronger than demand.

Nearing the end of 2018, and with one month’s house price data remaining, it appears likely that the average house price growth rate for 2018 will be slower than that of 2017, and be the fourth consecutive year of average price growth slowdown.

The year to date average growth rate for 2018 is 3.7%, which is slower than the 4.3% of 2017, and noticeably slower than the 6.8% high reached in 2013, just before the start of interest rate hiking early in 2014.

Turning to 2019, we project nominal average house price growth to be 3.7% for next year too – very similar to the 2018 likely outcome. Given an FNB CPI inflation projection of 5.3% for next year, this would translate into another year of house price decline in real terms.

FNB does foresee slightly better (but still weak) economic growth of 1.4% in 2019, compared with 0.7% for 2018. Against this, however, a further interest rate hike is projected in 2019 after the late-2018 hike. This is expected to cause slightly more conservative property spending in 2019 in what is always a highly credit-dependent market. Mild rate hiking, therefore, is expected to offset the mild support for the housing market coming from a slightly stronger economic growth forecast next year.

John Loos is the property sector strategist for FNB Commercial Property Finance.