House price growth expected to slow again in 2019

Expect ongoing gradual real property price correction in SA in 2019, says John Loos, property sector strategist at FNB Commercial Property Finance.

He says it appears likely that the average house price growth rate for 2018 will be slower than that of 2017, making 2019 the fourth consecutive year of average price growth slowdown.

For the coming year, FNB projects nominal average house price growth to be 3.7%. This would also, then, translate into another year of house price decline in real terms, says Loos.

'Slightly better economic growth'

"FNB does foresee slightly better (but still weak) economic growth of 1.4% in 2019, compared with 0.7% for 2018. Against this, however, a further interest rate hike is projected in 2019 after the late-2018 hike," he adds.

"This is expected to cause slightly more conservative property spending in 2019 - in what is always a highly credit-dependent market."

He, therefore, expects mild rate hiking to offset the mild support for the housing market coming from a slightly stronger economic growth forecast in 2019.

Gradual 'correction'

The FNB House Price Index continues to hover in low single digit growth territory, not too far from 4% year-on-year (y/y). On a y/y basis, the index's growth rate accelerated slightly to 4.2% in November 2018, from a slightly lower revised 4.1% rate in October.

The low single-digit growth in nominal terms continues to translate into a year-on-year price decline in "real" terms, when adjusting for CPI (Consumer Price Index) inflation. Loos says this means that the gradual housing market price "correction" continues, as it has since early-2016.

"Examining the longer run performance of the FNB House Price Index in real terms, we still see it at relatively high levels - 88.9 up on the January 2001 'pre-boom' index level - having risen sharply in that pre-2008 boom period," says Loos.

The cumulative real decline since the peak of that pre-2008 boom period, reached in August 2007, has been -20.8%.

Loos says FNB does not, however, believe that this cumulative real price correction to date has been sufficient to bring real home values back into line with what are now very weak economic fundamentals.

FNB's valuers continue to point to housing demand weakening, and with it the demand-supply balance as reflected in a declining FNB Valuers’ Market Strength Index. Loos says this appears to explain the ongoing house price decline in real terms.

He further notes that movements in demand and supply data indicate that valuers now rate residential supply as stronger than demand.

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