April average house price growth

(Article by John Loos)

The FNB House Price Index for April 2016 rose by 6.4 percent year-on-year. This is slightly faster than the revised 6.3 percent rate recorded for March, stalling a prior gradual slowing trend since the 6.9 percent high reached in October 2015.

The mild acceleration in April is not significant, but does stall the trend of slowing to lower single-digit price growth which we would expect on the back of rising interest rates.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the rate of house price growth hugs the zero level, having recorded zero in March, the result of a combination of 6.3 percent average house price inflation and 6.3 percent Consumer Price Index (CPI) inflation – April CPI data is not yet available. Zero percent real house price inflation would suggest a market still very well balanced between supply and demand.

The average price of homes transacted in April was R1 061 075.

Examining the longer term real house price trends – house prices adjusted for CPI inflation – we see that the level in March 2016 was +5.3 percent up on the October 2011 post-recession low.

However, the average real house price level remains -18.3 percent below the all time high reached in December 2007 at the back end of the residential boom period.

Looking back further though, the average real price currently remains 67 percent above the January 2001 level, around 15 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We therefore still regard current real price levels as very high.

In nominal terms, when not adjusting for CPI inflation, the average house price in March 2016 was 293.7 percent above the January 2001 level.

In such a credit dependent market, it is important to understand what the rate of change in monthly bond instalment is, given changes in house prices and mortgage lending rates.

Using a prime rate series, along with mortgage originator ooba’s time series for mortgage loans’ average differential from prime, we calculate an average mortgage lending rate and apply it to our average house price series to obtain an average monthly bond instalment estimate.

A further 50 basis point interest rate hike by the SA Reserve Bank in January, and another 25 basis point hike in February contributed along with a move into double-digit bond instalment inflation on the average priced home, from February.

In April, the year-on-year inflation rate in the bond instalment on the average-priced home measured 13.8 percent, slightly slower than the 14.8 percent rate for March. In real terms, adjusting for CPI inflation, that March bond instalment inflation rate was a very significant 8 percent. The April CPI data is not yet available.

FNB’s valuers, in their FNB Valuers Market Strength Index (MSI) have in recent times been perceiving a still well-balanced market. The valuers’ residential demand rating was at a level of 55.11 in April (scale 0 to 100), while the supply rating was at a lesser 53.8. This translates into an MSI of 50.65, with the level of above 50 implying that residential demand is still stronger than supply. Therefore, it should not be surprising to see FNB house price index inflation at near to zero percent in real terms, which reflects a still well balanced market. But the valuers continue to point to a weakening demand-supply balance, and if this trend should continue, it would probably ultimately imply a move to slower house price inflation.

Ongoing interest rate hikes, with the most recent one having been a 25 basis point rise in March, continue to take the market away from the speculator. To create a speculator’s paradise in residential property, it is important to have price growth at a percentage significantly faster than the percentage of the annual interest charged on a mortgage loan.

Such an environment would give rise to widespread use of cheap credit to buy and sell properties in a relatively short space of time and make big capital gains. The 2004 to 2005 period was such a speculators’ paradise.

To monitor this, we calculate our very simple alternative real prime rate, which adjusts prime rate to real terms using average house price inflation instead of the usual CPI inflation rate approach.

For a healthy market with low levels of speculation, we believe that this real rate should remain positive. Indeed, that was again the case in April, where the real alternative prime rate was 4.08 percent, having risen in recent times after further interest rate hiking along with slowing house price inflation. We thus believe the SARB’s monetary policy stance to be appropriate currently from a residential market health point of view.

With interest rates having risen further early in 2016, and the inflation rate in the bond instalment value on the average priced home has been rising in double digits early in 2016, it is likely that residential demand will slow further in the near term, with wage inflation unlikely to have kept up. Slower average house price inflation later in the year thus still remains a likelihood, we believe, despite the recent stickiness at near to 6 percent.

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

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