Year on year price growth slowed in January, after months of acceleration

by John Loos

In January 2018, the FNB House Price Index showed a slowing in year on year growth compared with the revised December 2017 rate.

This comes after some prior months of accelerating year on year growth, and keeps the index year on year growth rate in lower single digit territory at 4.7%.

However, we still expect that mildly improved national sentiment early in 2018, along with the expectation of stable interest rates this year and improved economic growth, could result in stronger average house price growth in 2018 compared with 2017’s average rate.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth was in mild positive territory, having recorded a +0.4% year on year rise in December 2017 (January CPI data not yet available), slightly slower than the 0.5% rate in November.

This slight slowing in revised real price growth from November to December was due to an unchanged 5.1% revised nominal house price growth rate in December (compared to November), while CPI inflation accelerated slightly from 4.6% year on year in November to 4.7% in December.

The average price of homes transacted in January was R1 116 444.

Examining house price growth on a month on month seasonally-adjusted basis (a better recent momentum indicator than the year on year calculation) suggests that, while certain leading business cycle indicators point to near term economic improvement, we may not quite be there yet.

The housing market can often be a good leading indicator of economic conditions. Our revised month on month house price growth rate showed a broad sideways movement in growth during the second half of 2017, but the January rate slowed noticeably from 0.28% in December to 0.12%.

The previous four noticeable dips in the manufacturing purchasing managers’ index (PMI), also a useful leading indicator of broader economy’s direction, have broadly correlated with the timing of the seasonally adjusted month on month dips in house price growth. It thus now remains to be seen whether this latest slowing in month on month house price growth will go further, given that the manufacturing PMI has been very weak in recent months. Therefore, although sentiment in the country appears to be improved early in 2018, and we are more upbeat regarding economic prospects for 2018, as yet the housing market is showing no strong indication of strengthening.

The recent rand strengthening, especially following the change of leadership at the ruling party’s December 2017 elective conference, begins to show up in the January FNB House Price Index when denominated in certain major foreign currencies.

The euro-denominated FNB House Price Index saw a year on year growth acceleration from -2.19% deflation in December to +1.03% in January, while the UK pound-denominated Index accelerated further from +2.4% year on year in December to 3.8% in January. But the major global currency news last year was a significant US dollar weakening, the result being seen in a strong +15.89% year on year growth rate in the US dollar-denominated FNB House Price Index.

Recent rand strength has thus started to lift the prices of domestic property for aspirant foreign buyers from certain key economies, especially those who operate in dollars, given the added impact of dollar weakness.

Examining the longer term real house price trends (house prices adjusted for CPI inflation), despite recent months of slight positive real house price growth, we see that the level as at December 2017 had lost -4.1% 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 December 2017.

However, looking back further, despite a mediocre performance in recent years, the average real price currently remains a massive 63.8% above the end-2000 level, 17 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 by historic standards.

In nominal terms, when not adjusting for CPI inflation, the average house price in January 2018 was 323.3% above the end-2000 level. By comparison, consumer goods and services prices, as measured by the CPI, were only 158.2% higher over virtually the same period (up to December 2017 due to January CPI data not yet available).

We also analyse house prices to view the magnitude of house price resales deflation vs inflation in the housing market. At any given time, there is always a certain amount of resales deflation within the overall market. By this we mean homes being resold at prices below that which they were previously bought for.

In times like the present when the market is weak and average house price inflation is low, it would be realistic perhaps to expect a higher percentage of homes being resold at deflated prices, and vice versa in stronger market times.

The causes of price deflation when reselling can vary:

  • Genuine market price deflation can be the cause in weak economic or rising interest rate times, such as in 2008/9, or a specific area can fall from favour and even go into decay.
  • A home may have originally been bought at an incorrectly high price which was above the true market value at the time. Establishing the true market price is tough in a market where each home’s characteristics differs in some way from the next.
  • Financial stress of the owner can lead to a deterioration in the property due to lack of maintenance and upkeep, or can cause a very hasty sale at below market value.

We use deeds data for properties bought and sold by individuals (natural persons) for these estimates.

The incidence of re-sales price deflation remains moderate, and the overall incidence of such price deflation expressed as a percentage of total sales has declined in recent months.

From 10.7% of total sales in September 2017, the estimated level of resale price deflation declined to 8.6% by December (having started 2017 at a higher 11.5%). Therefore, the incidence of resale price deflation lessened broadly speaking through 2017, despite slow average house price growth.

The December level of resales price deflation of 8.6% remains very low compared to the 23.4% peak-of-crisis level of September 2009.

We believe, a mild slowing in year on year house price growth at the start of 2018 is not yet reflective of certain positive economic developments which appear to be taking place. Economic growth had already emerged from last summer’s recession in the winter quarters of 2017, and the leading business cycle indicators of both the SARB and OECD have been pointing to possibly improved economic growth in the near term.

In addition, the change in leadership in the ANC in December appears to have been seen in a positive light by many, assisting in a significant improvement in investor sentiment and indeed the rand of late.

We would anticipate that a significantly improved national mood, along with signs of strong economic growth to come, which would in turn support better employment and household disposable income growth, should lead to some strengthening in residential demand and mildly stronger average house price growth this year.

The stronger rand, should it be sustained, also has implications for inflation (lowering imported goods prices), and is supportive of our FNB expectation of either sideways movement in interest rates through 2018, or even a possible interest rate cut.

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