FNB forecasts slower growth in property demand

House price growth, after adjustment to take account of the impact of inflation, is expected to be negative at minus 1 percent next year compared with projected positive 0.9 percent growth this year, according to First National Bank (FNB).

Real house price growth is expected to be negative next year despite slightly higher economic growth compared with this year.

John Loos, a household and property sector strategist, said yesterday that FNB was forecasting slower growth in residential market demand this year because growth was expected to be constrained by a still weak economic growth rate and higher interest rates since early last year and further possible rate hiking later this year.

Loos said this slower growth in residential demand was reflected in the forecast 0.9 percent growth in the FNB valuers demand strength rating compared with 7 percent last year. He said some growth was expected in residential supply after the decline in the FNB valuers supply rating over the past two years.

Loos said the net result of slowing demand growth and a return to positive supply growth would be a slower rate of increase in the FNB valuers market strength index to 0.4 percent this year from 5.5 percent last year, before turning negative at 0.5 percent next year.

However, Loos said FNB was forecasting a slight acceleration in average house price growth to 5.6 percent next year from the anticipated 5.3 percent this year.

"The reasoning behind this apparent irony has to do with the general inflationary environment 'dipping' in 2015 and expected to recover in 2016.

"The result of an expected higher CPI (consumer price index) inflation rate in 2016 is the forecast of a higher average wage inflation rate next year compared with 2015, which could drive a slight renewed acceleration in nominal house price inflation too," he said.

Rental market

However, Loos said the projected slowing pace of market strengthening was reflected in FNB's real house price growth forecast, which was positive at 0.9 percent for this year and down from 1 percent in 2014, but turning negative to minus 1 percent in 2016.

Loos stressed that the slower growth in the residential market did not refer to the rental market. There could be a mild pick up in rental inflation should interest rates resume their rise later this year.

Loos said this would fuel rental demand by encouraging some aspirant first time home buyers to rent for longer and "wait it out", and cause a higher number of sellers under financial pressure to scale down to a rental property as opposed to "buying down".

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