Real home prices falling

The FNB house price index showed a 2.6 percent year on year (y/y) increase for February after a revised 3.9 percent y/y gain in January.

The revision was due to the 5-yearly exercise of re-weighting of the FNB House Price Index’s (HPI) sub-segments‚ in order to keep up with longer term changes in the composition of housing stock that gets traded. New sub-segment weightings have led to some backdated changes in the FNB HPI.

FNB previously said that the HPI declined by 2.3 percent year on year (y/y) in January after a 1.1 percent y/y drop in December.

FNB household and property strategist John Loos said the slowing year-on-year house price growth‚ to levels back below consumer price inflation‚ implied a recent return to declining house prices in inflation-adjusted real terms.

“As at January (February consumer price inflation data not yet available)‚ the combination of a CPI inflation rate of 5.4 percent year-on-year‚ and a 3.9 percent nominal house price growth rate in that month‚ translated into a real year-on-year decline of -1.35 percent in the FNB House Price Index‚” he said.

“Monitoring longer term performance of the index‚ we see that in real terms‚ as at January the FNB House Price Index was still 58.7 percent higher than in July 2000 when the index started. However‚ since the revised real price peak reached in November 2007‚ real price levels have declined by -19.5 percent. In nominal terms‚ the index is 216.9 percent higher than July 2000‚ but only 9.5 percent above November 2007‚” he noted.

“Where to from here? It was a relatively strong economic period through the summer of 2011/12 to mid-2012 that aided a noticeable improvement in the housing market and house price growth.

"During the 2nd half of 2012‚ however‚ a slower domestic economy‚ hampered by widespread industrial action disruptions to production (the most extreme being in the mining sector)‚ was arguably instrumental in causing a slower pace of price growth in the 2nd half of 2012 and early-2013.

"However‚ recently we have started to see the economic growth situation “normalize”. From a lowly 1.2 percent quarter-on-quarter annualized growth in real gross domestic product (GDP) in the third quarter of 2012‚ the fourth quarter rate accelerated mildly to 2.1 percent. More recently‚ the February Manufacturing Purchasing Managers’ Index‚ a very useful current indicator of economic direction‚ rose to above 50‚ signaling renewed expansion in manufacturing after a late-2012 slump.

"The Reserve Bank Leading Indicator‚ too‚ has recently pointed to slightly better economic times in the near term. After a period of negative year-on-year growth through much of 2012‚ its growth rate returned to positive territory from September through to the end of the year‚ suggesting that we were probably headed for better economic growth at the start of 2013‚” he added.

“Therefore‚ we would expect the recent slowing in year-on-year growth to come to an end soon‚ as the lagged impact of mildly improved economic times takes effect on the housing market. However‚ the expectation that house price growth will remain in lower single-digit territory for the year‚ below consumer price inflation and thus negative in real terms‚ still holds.

"This mediocre expectation is on the back of our forecast for no further interest rate reduction in 2013‚ and although economic growth is expected to be better than it was late in 2012‚ a 2.7 percent 2013 forecast growth rate remains weak‚ constrained by global economic mediocrity as well as a highly-indebted household sector‚” he concluded.

Absa said they expected a third consecutive year of real house price declines this year.

Article by: Helmo Preuss -

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