House price inflation slows once more.

(Article by John Loos- household and property sector strategist at FNB Home Loans)

The FNB National House Price Index rose by 6.6 percent year-on-year in August. This represents a slowing in the pace of growth from a revised 7 percent year-on-year rate in July, and the third consecutive month of slowing since the 7.4 percent revised 2016 high reached in May.

On a month-on-month seasonally-adjusted basis, the index’s rate of inflation has slowed from its 0.71 percent 2016 high point in May to 0.46 percent in August. This comes after a prior mini-surge in month-on-month house price inflation in the months leading up to May.

Month-on-month house price mini-trends often broadly track key indicators of economic performance. That recovery in month-on-month house price growth up until May more-or-less coincided with some noteworthy recovery in the Barclays Manufacturing Purchasing Managers’ Index(PMI). This, along with other indicators, pointed to some likely mild improvement in the country’s economic performance in the second quarter of 2016 after a dismal contraction in GDP (Gross Domestic Product) in the first quarter.

More recently, however, it is possible that the renewed slowing in month-on-month house price growth post-May may hint at, or reflect, renewed lull in the economy emerging in the third quarter.

In real terms, adjusting for CPI (Consumer Price Index) inflation, the house price index remained in mild positive growth territory to the tune of 0.9 percent year-on-year in July, with CPI inflation of just above 6 percent, still below house price inflation of 7 percent in that month (CPI data for August not yet available).

Our latest index estimate shows house prices in real terms as being 3.8 percent up on the post-financial crisis low point reached in November 2011, but -20.1 percent down on the boom time high reached in December 2007.

Taking a long term backward-looking view, in real terms we find the index to still be 66.8 percent higher than pre-boom levels of January 2001.

In nominal terms (current prices), the index has inflated by 302.1 percent since January 2001, and 47.1 percent since the May 2009 post-boom low-point.

The average estimated price for home transactions in August was R1 078 099.

The recent month’s house price inflation estimates remain mildly ahead of average rental inflation, according to the StatsSA CPI rental data. As yet, therefore, there has been no reversal of the gradual rise in the house price-rent ratio since 2013. The rise in this ratio gradually causes home buying to lose some appeal relative to the rental option, and can ultimately weigh on the home buying market.

However, rental inflation has gradually edged higher from 4.3 percent year-on-year in mid-2012 to 5.3 percent by June 2016. And looking forward, we remain of the expectation that average house price inflation will slow into lower single digit territory in the near term, dragged lower by the lagged impact of past interest rate hiking, weak national sentiment in a stagnant growth environment, and mounting speculation over further ratings downgrades for South Africa. This could see a near term end to the rising trend in the price-rent ratio, with the rental market beginning to outperform the home buying market by a small margin in the not too distant future.

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