Still no sign of a positive national sentiment shift affecting national house price trends

by JOHN LOOS

In February the FNB House Price Index grew by a slower 2.3%, year on year, down from a revised 3.8% in January, and from 2017’s high of 5% reached in November.

This does not, however, alter our view that 2018 should be a mildly stronger housing market year than 2017. We believe that this weak house price growth in early-2018 is reflective of the weak sentiment and market conditions late in 2017 still feeding through to prices with a lag.

But with sentiment appearing to be much-improved early in 2018, we remain of the expectation that economic growth in 2018 will pick up, interest rates remain stable or even decline slightly, and housing demand should be a little stronger, all of which would cause mildly stronger house price growth in 2018 compared to 2017.

From a 2017 high of 5%, reached in November 2017, the FNB House Price Index’s year on year growth rate has slowed once more to 2.3% by February 2018, a further slowing on January’s revised rate of 3.8%.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, year on year house price deflation of -0.6% was recorded in January (February CPI data not yet available), with CPI inflation in that month measuring 4.4% year on year.

The average price of homes transacted in February was R1 099 610.

Examining house price growth on a month on month seasonally-adjusted basis, a better indicator of very recent price growth momentum than year on year rates, we have seen a recent period of deflation, reaching -0.79% in February.

It is not uncommon to have short month on month bouts of deflation, and we believe that this most recent one is still the effect of a period of very weak sentiment in the country late in 2017, still feeding through into house prices with a lag.

That same negative sentiment was reflected in our FNB Estate Agent Survey Activity Rating through 2017, where we asked the sample of agents surveyed to give a rating to how they perceived activity in the market, on a scale of 1 to 10.

By the fourth quarter of 2017, this rating had declined to 5.29, down from a multi-year high of 6.78 reached back in early-2014, and the lowest activity rating since the second quarter of 2009.

In addition to activity declining, the agents had reported a steady rise in the average time of homes on the market to a multi-year high of 17 weeks and two days by the final quarter of 2017, from less than 12 weeks early in 2016, implying a market moving further away from equilibrium between demand and supply towards an oversupplied market.

These indicators by and large explain the weak year on year house price growth in early-2018, and the month on month house price decline, with last year’s weak market fundamentals still feeding through to house prices with a lag.

However, we remain of the expectation that 2018 will be a mildly stronger year for the housing market and house price growth, projecting a 4.8% average growth rate for 2018 after a lower 3.8% for last year.

The signs are still there for an improved economic performance this year. Business confidence in the country appears to have been boosted by the leadership change in the ruling party in December 2017, and now further by the composition of President Ramaphosa’s cabinet, especially by the return of business-popular ministers Nene and Gordhan to key cabinet posts.

The rand continues to perform solidly, a reflection of this improved sentiment, and it is likely that consumer confidence will move in a similar direction.

Furthermore, with CPI inflation at a lowly 4.4% year on year in February, and the rand’s stronger performance likely to curb imported inflationary pressures going forward, the prospect is not only for mildly stronger economic growth, nearer to 1.5%, in 2018, but also an increased possibility of a further interest rate reduction.

Nothing economically look very strong, just mildly better than where we come from, and mildly better for the economy probably means mildly better for the housing market.

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