Some acceleration in August nominal house price growth, but the real price correction continues slowly

by JOHN LOOS

In August 2017, the FNB House Price Index showed a mild acceleration in year on year growth compared with revised July growth. However, at 4% year on year the rate of increase remains in lower single-digit territory, as we have expected it to do through 2017, and this implies that the slow real house price correction continues – “real” referring to after deflating the average house price with the Consumer Price Index.

Eight months into this year, it still appears increasingly likely that 2017 will represent the 3rd consecutive year of slowing average annual house price growth, and the 2nd consecutive year of house price decline in consumer inflation-adjusted real terms.

For the period January to August 2017, the average year on year growth rate in the FNB House Price Index was 3%. This is in line with our 3% average price growth forecast for the entire 2017. It is lower than the revised 4.9% recorded for 2016, and well down on the post-2008/9 recession high of 7% reached in 2014.

In real terms (CPI inflation-adjusted), the average year on year rate of decline was -3.1% for the period January to July 2017, a weakening from the -1.3% average rate of decline for 2016 as a whole.

The FNB House Price Index for August 2017 rose by 4.0% year on year. This is a mild acceleration from the revised 3.5% for July.

Backward revisions in the data points for recent months occur regularly, partly due to some raw data additions periodically, but mostly due to our application of light smoothing using a statistical smoothing function.

In real terms, when adjusting for CPI inflation, the house price correction gradually continued, with the real rate of house price growth remaining in negative territory to the tune of -1.0% year on year decline in July (August CPI data not yet available). This is a diminished real house price deflation rate, however, from -1.7% year on year in June and from a low of -4.8% reached in December 2016.

This diminished real price decline in July was the combination of slight acceleration in the house price inflation rate of that month from 3.3% in the prior month to 3.5%, along with a deceleration in CPI inflation from 5.1% in June to 4.6% in July.

The average price of homes transacted in August was R1 103 322.

A recent month on month house price growth dip appears to have been reflective of a recent economic weak period, but the August rate improved slightly

House price growth on a month on month seasonally-adjusted basis – a better momentum indicator than the year on year calculation – has suggested that we have recently had a period of greater economic weakness, with the month on month seasonally-adjusted house price growth rate slowing from a 0.82% high in March to 0.32% in July.

In August, however, there was a slight increase to 0.35%. An accelerating trend in month on month growth can often mean a slightly better period for the economy emerging, although we would not conclude this from only a on month acceleration to date.

The housing market can often be a good leading indicator of economic conditions, and indeed we often find that dips in month on month house price growth more or less coincide with dips in the Absa Manufacturing PMI (Purchasing Managers’ Index). The large manufacturing sector is very often a good indicator of broader economy-wide direction, and thus the PMI can be a good up to date indicator of the economy’s direction. In recent months, the Absa PMI recorded very weak readings, including a 42.9 reading in July and 44 in August. A below-50 reading points to possible manufacturing sector contraction.

Hopefully, the slight August rise in this growth rate is a sign of slightly better economic times to come, but a few more months of house price data will be required before we would conclude that this is the case.

Examining the longer term real house price trends (house prices adjusted for CPI inflation), we see that the level as at July 2017 had lost -4.4% since a post-2008/9 recession high in December 2015.

Looking a bit further back to the all-time real house price peak at the end of 2007 (at the end of the pre-2008 housing boom period), on a cumulative basis real house prices were -19.2% down on that high as at June 2017.

However, looking back further, despite a mediocre performance in recent years, the average real price currently remains a massive 64.0% above the end-2000 level, around 16.5 years ago, and a time back just before boom-time price inflation started to accelerate rapidly.

In nominal terms, when not adjusting for CPI inflation, the average house price in August 2017 was 318.3% above the end-2000 level. By comparison, consumer goods and services prices, as measured by the CPI, were only 154.5% higher over virtually the same period up, to July 2017 as the August CPI data is not yet available.

Where to from here for house prices? Based on FNB macroeconomic forecasts, we would expect some mild lift in average house price inflation in 2018 and again in 2019. After a forecast average of 3% for 2017, we project a mild acceleration to an average of 4.7% in 2018 and 5.2% in 2019.

The FNB macroeconomic forecasts, underpinning this house price forecast, project a mild acceleration in real economic growth in 2018 to 0.9%, from an expected 0.5% for 2017, and a further rise to 1.3% in 2019. This small growth acceleration in 2018 is expected to be driven by some strengthening in the global economy’s growth rate.

On top of this, we have had one 25 basis point interest rate cut in 2017 to date, and expect one further 25 basis point cut before 2017 is out. This could provide some further mild stimulus to housing demand heading towards 2018.

However, despite an expectation of a small nominal house price growth acceleration, these forecasts translate into ongoing decline in average house prices in real terms, when the house price index is deflated using the CPI. We believe it realistic to expect an ongoing real house price correction through the forecast period, because the small economic growth improvement to 1.3% by 2019 would still be a very weak growth outcome.

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