Mining town house prices are declining in real terms

(by John Loos*)

The FNB Mining Towns House Price Index points to an underperformance in the major mining regions, as well as to house price deflation when adjusted for consumer price inflation and measured in real terms.

Using deeds office data transactions by individuals in regions deemed to be residential, in towns heavily dependent on mining, we estimate an average mining towns house price index.

The index has clearly underperformed that of the major metro regions over time, as one would have perhaps expected in markets heavily driven by a long term declining industry.

Whereas our major metro house price index had recorded 7.4 percent year-on-year house price inflation in the second quarter of 2015, the mining towns house price index recorded a slower 3.6 percent.

Converting the index to real terms, adjusting for consumer price inflation over time (using PCE deflator), we see negative growth to the tune of -0.4 percent in the first quarter. While we wait for complete second quarter PCE inflation data, the second quarter was almost certain to be negative in real terms yet again, given that inflation has been rising from its first quarter low.

The weakness in the mining town index is hardly surprising, given the current and long term weakness in mining sector production growth. Current levels of the South African mining production index are back at levels similar to the late-1990s, before that production growth surge of sorts early to mid- last decade.

With little longer term improvement in output levels since the 1990s, it is of little surprise that the mining towns house price index, and especially the gold mining towns house price index, has underperformed the major metros since the late 1990s.

To illustrate these relative long term performances, we compile the various house price indices using the first quarter of 1999 as the starting point where all are equal to 100. Since the first quarter of 1999, the major metro house price index has risen by 513.55 percent, the mining towns index by 427.19 percent, and the battling gold mining towns index by an even lesser 363.17 percent.

The residential markets in these towns don’t yet appear extremely weak, however, still inflating slightly in nominal terms. Importantly, there has been some mining production growth to provide small support in recent times. After a sizeable mining output dip in 2014, which had much to do with major strike disruptions especially in the platinum sector, production growth returned to positive rates earlier this year.

However, the situation looking forward appears bleak. Commodity prices globally have dropped sharply, with the IMF metals commodity price index having almost halved since early 2011.

Coupled to this the mining sector’s labour relations situation is tense, and news of potential production cuts and retrenchments has proliferated in recent times.

On top of this, like everyone else in South Africa, many home owners in these towns have to contend with slowly rising interest rates.

Looking forward, therefore, we would expect the mining regions’ residential markets to continue to be one of the underperforming segments of the national residential market, with real house price decline continuing, and with the risk of even moving to periodic nominal house price decline.

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

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