Year on year house price growth accelerated in June, but prices are still in decline in real terms

by John Loos

In June 2018 the FNB House Price Index grew by a faster 4.1%, year on year, up from the previous month’s 3.9%, and from a February 2018 low of 2.9%.

This is the fourth consecutive month of house price growth acceleration. However, signals from the FNB Estate Agent Survey suggest that the acceleration in  year on year house price growth may be short-lived.

We believe this recent mild acceleration in house price growth to be the lagged impact of that brief sentiment improvement in the country early in 2018 following the major political leadership changes in the country, notably a change in president. That sentiment improvement led to a noticeable first quarter increase in residential market activity and demand according to the FNB Estate Agent Survey, and this has arguably fed through into price growth of late.

In real terms, however, when adjusting for CPI (consumer price index) inflation, house prices remain in decline. As at May 2018 (June CPI not yet available) real house prices declined year on year by -0.5%, with CPI inflation at 4.4% in that month and house price growth at 3.9%.

Examining the longer run performance of the FNB Repeat Sales House Price Index in real terms, we still see it at relatively expensive levels, 90.8% up on the January 2001 pre-boom index level. This is despite significant cumulative correction of -20.1% since the all-time real high reached in August 2007 at the back end of the pre-2008 housing bubble.

More recently, following the mild post-2008/9 recession recovery, real house prices have declined cumulatively by -2.6% since a nine-year high reached in February 2015.

Looking ahead to the near term, it has become apparent that the politically-driven first quarter 2018 domestic sentiment spike was short-lived, and that by the second quarter of this year sentiment was largely back in the doldrums. SA households continued to experience a stagnant economy, and costs of living continue to rise on the back of petrol price increases and tax hikes.

The second quarter 2018 housing market weakening was witnessed in our own FNB Estate Agent Survey, with agents reporting a significant drop in residential market activity in the May 2018 quarterly survey, after the first quarter spike.

In the survey, we ask respondents to provide a rating of market activity in their areas, a subjective rating on a scale of 1 to 10. The first quarter 2018 FNB activity rating jumped noticeably from 5.29 in the previous quarter to 6.18. Even on a seasonally adjusted basis, the jump was the most noticeable in over three years, from 5.4 in the prior quarter to 5.79. But this was quickly reversed in the second quarter, the activity rating falling back sharply to 5.28 (5.37 on a seasonally adjusted basis)

Further support for the perception of a weakened housing market in the second quarter of 2018 was provided by a renewed lengthening in the estimated average time of homes on the market prior to sale, from 14 weeks and one day in the prior quarter to 16 weeks and four days in the second quarter, according to the estate agent survey.

Our main FNB estate agent survey indicators for the second quarter are thus pointing to the first quarter sentiment spike being short-lived, with market weakening once more in the second quarter. This suggests to us that the recent mild house price growth acceleration will be short-lived. A first quarter GDP (Gross Domestic Product) contraction suggested little support for the housing market from the economy in 2018 either.

Half way through the year, average house price growth for 2018 sits at a lowly 3.4%, slower than the 4.2% average growth for 2017.

Therefore, the signs are increasingly pointing to an even slower average house price growth year in 2018, than in 2017, and possibly the fourth consecutive year of house price growth slowdown, despite a recent mild growth acceleration.

Whereas we had expected a little more early in 2018, originally projecting an average 5 to 6% house price growth rate for the year, the short-lived nature of that early-2018 national sentiment spike leads us to adjust our average house price expectation for 2018 lower into the 3 to 4% range.

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