House price growth will likely be slower than last year - economist

Cape Town - The average house price growth in South Africa during 2017 as a whole is expected to be slower than in 2016, according to John Loos, household and property sector strategist at FNB.

He anticipates that in 2017 the average nominal house price growth will be around 3%.

The FNB House Price Index for 2016 as a whole rose by 5%, slower than the 7.2% and 6.5% for 2014 and 2015 respectively. The growth in 2016 was largely due to better growth in the early stages of the year, with the second half showing a steady slide, according to Loos.

"What is also noticeable in these past eight months is that the pace of slowdown in growth has been more rapid than any slowing growth phase of the past five years or so. The rate ended the year sharply lower than the 2016 high of 6.9% in April," he explained.
In his view, the slowdown is the lagged impact of residential demand that has been slowing for some time.

Price correction in real terms
In real terms, Loos said one could say a type of price “correction” is under way.

In real terms, for 2017 the house price growth will be negative. Loos told Fin24 that ultimately he thinks the market has to correct quite a bit.

"I don't think you can put a number to it. SA residential property is still expensive. House prices now do not really reflect a weak economy. We are a very low growth economy these days, so I do think over the next few years we should see some further correction in house prices which better reflect the ongoing economic weakness," said Loos.

"For much of the time I think we will see a decline in house prices in real terms - probably this year and for a few years to come."

Adjusting for Consumer Price Index (CPI) inflation, the average real rate of decline was -4.4% year-on-year (y/y) in November - the December CPI data is not yet available.

"Given CPI inflation still above 6%, the December real decline promises to be even more significant given further slowing in nominal house price growth," said Loos.

However, he does expect economic growth in SA to move slightly higher to around 1% in 2017 and, in his view that could lead to mildly stronger household income growth and housing demand. This, in turn, could make house price growth a little stronger later on in 2017.

Loos explained that, since December 2015, the average house price in real terms has declined by -4.7%. Since the end of 2007 real prices are actually down -22.2%. Loos told Fin24 this decline should be seen within the context of the boom at that time having been a bit of a bubble, "with even a few hundred percent climb at some time".

"Even given the fact that it has come down so much since 2007, I still think our housing market is expensive in real terms," said Loos.

The average real price currently remains 61.5% above the level experienced at the end of 2000, for instance.
"Real house price levels, therefore, remain high compared to pre-boom levels - the boom having been from early in the last decade to the end of 2007 - despite some noticeable 'correction' since the end of 2007," said Loos.

"The real house price decline in 2016 came as no surprise, with a slowing housing market being the result of a broad slowing in economic growth since around 2012, and two years of mild interest rate hiking from early-2014 to early-2016."

READ: Property experts weigh in on 2017 outlook

Monthly figures

The FNB House Price Index for December 2016 saw its nominal y/y growth rate reach a 1.3%, from a November rate of 1.9%.

This represents the 8th consecutive month of slowing y/y price growth, and is the slowest y/y rate of increase since May 2011.

On a month-on-month (m/m) seasonally adjusted basis the FNB House Price Index has shown five consecutive months of price decline. The rate of decline has diminished slightly from a low -0.33% m/m decline in September to a lesser -0.2% by December 2016. The rate of house price inflation had slowed to 1.6% y/y by December 2016.

The average estimated house price for December was R1 055 210.

"There are various signs of a mildly improving economy to come in 2017, and indeed we do expect economic growth to move slightly higher to around 1% this year," said Loos.

"The periodic short dips in the m/m rates of change, either to lower inflation or most recently into deflation, appear to broadly coincide with the short term fluctuations in the economy’s performance."

The Manufacturing Sector Purchasing Managers’ Index (PMI) - one of the economy’s leading indicators - has, for instance, again dipped to below 50 in recent months. To Loos this signals some contraction in this large and cyclical sector.

"This sector is a good barometer of the direction of economic growth much of the time and the fluctuations in the m/m house price rate of change, therefore, merely appear to be tracking economic fluctuations," he said.

"Diminishing rates of house price deflation m/m could, therefore, suggest that the economy may once more be set to move into a slightly stronger period, or perhaps better put, a 'less weak' period."

Loos told Fin24 that m/m is a better way to look at the recent price momentum since it translates with a bit of a lag to y/y. The fact that the m/m rate has been negative for a couple of months could, therefore, mean that the y/y rate could touch a negative growth rate, although at the moment he does not think this will happen.

"We are starting to see m/m deflation diminishing and the economy might be slightly better in near term, so I don't think y/y will carry on slowing down for too much longer. It could improve in the second half of the year," said Loos.

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