Drop in oil price - what is the effect on the property market?

The recent drop in the oil price might influence the residential property market positively. And with the subsequent slower consumer price inflation, is set to lower interest rate hike risk.

FNB household and property sector strategist, John Loos had said that reports of a current oil "glut" should perhaps be a cause for happiness for those linked to the residential property market.

"While oil markets can be wild and unpredictable, it would appear that for the time being strong supply capacity has significantly reduced the risk of a 2008-style oil price spike.

"This, along with global food prices and the rand both more or less 'playing the game' contributes to the FNB expectation for consumer price inflation (CPI) to slow in 2015 to 5.2 percent from an expected 6.1 percent average for 2014.

"This, in turn, can take the pressure off the Reserve Bank to hike interest rates. Slower consumer price inflation would also be a boost for household disposable income growth in real terms, which drives the purchasing power for the housing market," he said.

However, Loos said significant risks still existed in terms of a large current account deficit on the balance of payments, which could lead to rand and imported price volatility, while food prices were always at the mercy of global weather patterns and South Africa's stagnating economy suffered from a lack of positive structural reform.

But he said there was for the time being a big apparent difference between the economic risks of 2008 and the present because of the oil market, leading to a sharply diminished source of "shock risk" to South Africa's residential market.

He said the residential market also looked set to experience a more noticeable increase in supply of new stock.

Although there had not been too many indications of a surge in building completions in the Statistics SA data, the square metres of building plans passed in September reached a year-on-year growth rate of 25.5 percent.

This meant that the year-on-year growth in the third quarter was a healthy 19.2 percent and significantly higher than the 0.55 percent growth achieved in the second quarter, he said.

Loos believed that the new development sector would respond more strongly to mounting supply constraints in the existing home market and the recent surge in plans passed was a sign of things to come next year.

He said that FNB was therefore projecting the square metreage of building completions next year to rise by 23.6 percent off the current low base, which was expected to alleviate some of the supply constraints that existed and contained the extent of further house price inflation increase.

But Loos said that FNB still believed there would be some mild strengthening in house price growth before a longerterm price correction "in the outer years past 2015".

FNB house price index released yesterday showed that average prices rose 7 percent year on year last month, which was faster than the previous month's revised 6.6 percent.

Loos said this recent renewed acceleration followed the slowdown in the average year-on-year house price growth rate dating back to the beginning of the year.

He said that the renewed price growth acceleration had a few potential implications for banks that provided home loans, including that the value of security backing existing home loans was enhanced, which was a key positive.

Loos added that the potential "downside" could be for future home buyers and home loan applicants if house price growth accelerated much further and began to outstrip wage inflation, which would begin to create a greater affordability challenge.

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