Price growth rate starts to strengthen as economy shows signs of improvement

by John Loos

The FNB House Price Index growth rate for March has started to show signs of some renewed strengthening, accelerating from a revised 2.7% year-on-year in February to 4.1% in March.

The average price of homes transacted in June was R1 097 232.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price change remains in negative territory, having recorded a –3.4% year-on-year decline in February. This is the result of a combination of +2.7% average house price inflation and +6.3% CPI inflation in February (March CPI data not yet available).

The magnitude of this house price deflation in real terms has begun to represent a noticeable house price correction of late. Since December 2015, the average real house price has declined by a revised -4.6%.

Examining the longer term real house price trends (house prices adjusted for CPI inflation), we see that there has only been a minor gain of +1.3% since the revised post-2008/9 recession low reached in November 2012.

The average real house price level is now -22.2% below the all-time high reached in December 2007 at the back end of the residential boom period.

Looking back further, however, the average real price currently remains 61.5% above the end-2000 level, around 16 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore still regard current real price levels as high.

In nominal terms, when not adjusting for CPI inflation, the average house price in March 2017 was 312.4% above the end-2000 level.

Examining house price growth on a month-on-month basis shows a move back into positive territory in recent months.

On a seasonally-adjusted basis, month-on-month house price inflation measured 1.7% in March, after a revised positive rate of 1.2% in February. This comes after a prior deflation period late in 2016.

These month-on-month house price fluctuations appear to reflect short term economic performance fluctuations. The manufacturing sector is one sector that normally reflects the direction of the overall economy quite well, and we thus see the high frequency peaks and troughs in month-on-month house price rates of change broadly correlating with the Barclays Manufacturing Purchasing Managers Index (PMI).

The PMI shifted back up to a level above the crucial 50 mark (scale 0 to 100) in January/February 2017, after also having spent the previous five months below the 50 level (50 being the dividing line between expansion and contraction in output).

Therefore, our FNB House Price Index has begun to point to some recovery, although still seeing negative house price growth in real terms (when adjusted for CPI inflation). This is not too surprising given signs of a moderate economic recovery in SA.

The SARB leading indicator has been pointing upwards for some months, and the Barclays Manufacturing Purchasing Managers Index, a useful high frequency indicator of economic direction has also moved back into expansionary territory in recent months. Global commodity prices are stronger, and domestically the drought conditions have alleviated.

However, key risks to the economy and thus the housing market remain due to developments on the political front, notably the removal of Minister of Finance Gordhan and the risk of further ratings downgrades for South Africa.

Should significant further pressure be exerted on capital flows out of SA, and as a result on the rand, the additional imported inflation pressures can lead to an unexpected resumption of interest rate hiking, which could curb residential demand and thus house price growth once more.

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