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House price growth approached a “mini-peak”, at 4.1% in September

|article by John Loos - household and property sector strategist at FNB Home Loans.

In September, the FNB House Price Index showed a further mild acceleration in year on year growth compared with revised August growth.

However, a better momentum indicator is the month on month seasonally adjusted growth calculation, and this points to renewed slowing, suggesting that with the customary lag the year on year price growth rate is also probably set to resume a slowing trend in the near term, constrained by an economy battling to achieve any meaningful growth.

The FNB House Price Index for September 2017 rose by 4.1% year on year. This is a mild acceleration from the revised 3.8% for August.

In real terms, when adjusting for CPI (Consumer Price Index) inflation, the house price correction gradually continued, with the real rate of house price change remaining in negative territory to the tune of a -0.9% year on year decline in August (September CPI data not yet available). This is a diminished real house price deflation rate, however, from -1.1% year on year in July and from a low of -4.8% reached in December 2016.

This diminished real price decline in August was due to the acceleration in the year on year house price inflation rate of that month from 3.4% in July to 3.8%. However, a slight rise in CPI inflation from 4.6% year on year in July to 4.8% in August partly offset the effect of the house price growth acceleration.

The average price of homes transacted in September was R1 102 394. However, while the year on year house price growth rate still shows mild acceleration, a better way to be up to date on most recent house price growth momentum is to view it on a month on month seasonally-adjusted basis.

Calculating house price growth on this basis we see a resumption of the slowing price growth trend, which started in April 2017, after a very brief pause for a solitary month in August.

The month on month house price growth rate was a lowly 0.13% for September, down from the prior month’s 0.25% and now well-down on the 2017 high of 0.82% reached in March.

This most recent month on month slowing house price growth trend once again broadly coincides with a marked dip in the Absa Manufacturing Sector Purchasing Managers Index (PMI), suggesting that it is reflective of a renewed economic dip after a brief economic growth improvement in the second quarter of 2017 which ended the prior two-quarter recession.

Not only does the recent slowing month on month house price growth rate point to possible renewed weakening in the economy, but also to the likelihood that year on year house price growth may soon begin to slow once more.

If we annualise the most recent 0.13% month on month rate, it tells us that, in the hypothetical scenario of house price growth remaining at this September rate, in the next 12 months we would achieve a mere 1.61% growth in total over the period.

It thus appears highly likely that low single-digit average house price growth will continue in the near term, and that the house price correction will continue in the form of a further price decline in real terms (adjusted for CPI).

Viewing the bigger annual picture, the renewed slowing in month on month house price growth suggests to us that, despite a brief acceleration in monthly year on year house price growth in 2017 to above 4% in September, for the year as a whole we are likely to see average house price growth slower than that of the past three years – 2014 recording 7% price growth, 2015 6.2%, and 2016 4.9% – with the year to date year on year average price growth sitting at 3.1%, and a -3.1% decline in real terms.

Examining the longer term real house price trends (house prices adjusted for CPI inflation), we see that the level in August 2017 had lost -4.6% since a post-2008/9 recession high in December 2015.

Looking a bit further back to the all-time real house price peak at the end of 2007 (at the end of the pre-2008 housing boom period), on a cumulative basis real house prices were -19.2% down on that high as at August 2017.

However, looking back further, despite a mediocre performance in recent years, the average real price currently remains a massive 63.9% above the end-2000 level, around 16.5 years ago, and a time back just before boom-time price inflation started to accelerate rapidly.

In nominal terms, when not adjusting for CPI inflation, the average house price in September 2017 was 318.0% above the end-2000 level. By comparison, consumer goods and services prices, as measured by the CPI, were only 154.7% higher over virtually the same period – up to August 2017 as September CPI data is not yet available.




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