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FNB: House prices will decline further

Despite mild improvement in year-on-year growth for January, FNB still expects further real house price decline.

The January 2012 FNB House Price Index showed a slight acceleration entering the new year, rising from a revised year-on-year growth rate of 4.7% in December to 5.6% in January. This was the highest year-on-year growth since August 2010.

In real terms, however, the recent growth rates implied that real house price decline continued. Consumer price inflation for December was around 6.1%, and a 4.7% house price growth rate in that month therefore translated into a decline of 1.4%.

This meant that in real terms, the latest revised figures put the average house price in real terms (adjusted for consumer price inflation) at -15.5% lower than the peak of February 2008.

FNB said that somewhat of a mild storm appeared to be raging in the residential industry as a result of the release of the recent Rode and Associates report, which claimed the residential property market was about 25% "overvalued". This was interpreted to mean by FNB that it would require a very significant decline in house prices in real terms in order to get back to what Rode deemed to be an "appropriately priced market" that would be in "balance" or "equilibrium".

The bank reasoned that the equilibrium price level (if one could determine it) was very much a moving target, fluctuating frequently as economic fundamentals change, and was thus difficult to determine.


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