Just 1-1.5% economic growth expected to sustain real house price correction

by JOHN LOOS

On a year on year basis, the FNB House Price Index’s growth rate has recently begun to slow once more. From a revised 3.9% rate for July, growth slowed to 3.5% in August 2018.

This is the second consecutive month of slowing year on year growth with the latest revised figures, off a 2018 high point of 4.1% reached in June.

While price growth is still mildly positive in nominal terms, it remains negative in real terms, when adjusting for CPI (Consumer Price Index) inflation. This means that the gradual housing market price correction continues in the form of a slow real price decline that has been in play since early-2016. As at July 2018 (August CPI not yet available) real house prices declined year on year by -1.2%, with CPI inflation at 5.1% in that month and house price growth at 3.9%.

The most recent slowing in year on year house price growth has been expected in recent months due to a prior commencement of slowdown in the month on month rate. To better evaluate recent house price growth momentum, we examine month on month house price growth on a seasonally-adjusted basis. Month on month growth direction leads year on year growth direction, and here we have seen four consecutive months of month on month house price growth slowdown. From a high of 0.67% month on month growth in April, this rate has slowed to 0.08% as at August 2018.

With eight months’ worth of house price data available for 2018, it appears highly likely that 2018 as a whole will turn out to be a slower average house price growth year than 2017, with 2017 having recorded 4.2% average price growth, and 2018 a year to date 3.5% average.

This puts real average house price decline at -1% for the year to date, and suggests that 2018 will be the third consecutive year of real house price decline. This recent period of real price decline is termed our second post-bubble house price correction phase, the first correction phase having been around 2008/9.

The multi-year trend of low-but-positive nominal house price growth, but which remains below CPI inflation translating into a decline in real terms, suggests that the sluggish rates of economic growth of recent years are insufficient to create enough housing demand so as to keep the housing market in balance.

This 2016 to 2018 period has been one with little in the way of interest rate stimulus (2 x 25 basis point cuts only, and some additional help from the pricing squeeze on home loans in recent times), and GDP growth not exceeding 1.5% year on year at any stage (1.3% average for 2017).

Looking ahead, Firstrand’s annual GDP growth forecasts fluctuate not far from 1.5% a year for the period up to 2020. In addition, the forecast is for interest rates to begin rising mildly from 2019, given mildly higher CPI inflation projections.

Based on the performance of house prices in recent years, we believe that, should such a weak growth and rising interest rate environment materialise, this would be insufficient to significantly alter the housing market’s performance from the current low positive single digit house price growth environment.

Therefore, we forecast house price growth to average in a range between 3% and 4% for our forecast period to 2020, which would imply a negative rate in real terms through the forecast period.

The housing market would thus remain somewhat off its equilibrium – where housing demand and supply are in balance – through the forecast period, which is seen in the projected average time of homes on the market before sale moving in a 16-18 week range, whereas we believe around 12 weeks to be more or less where market equilibrium is.

To achieve positive house price growth in real terms, we believe that economic growth would need to be nearer to 3%, which appears unlikely in the near future. On the other hand, we believe that a full blown recession (GDP decline) would cause not only real house price decline but also nominal (actual) house price decline.

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