Property prices surging

The June FNB House Price Index continued to show rising year-on-year growth to the tune of 12.6 percent. This is higher than May’s revised growth rate of 12.2 percent and is the seventh consecutive month of positive year-on-year growth. In real terms, adjusted for CPI inflation, this all translates into house price growth of 7.2 percent year-on-year for May.

However, it must also be said that there are signs that the pace of acceleration in year-on-year growth is starting to slow. Whereas the growth acceleration from March to April was two percentage points, and from April to May 1.9 percentage points, the latest acceleration was down to 0.4 percentage points.

Have we reach the peak?

While we would need a few more months’ worth of data points to confirm any trend change towards lower house price inflation, it is plausible that we are now approaching the peak in year-on- year growth for two reasons.

Firstly, in the second half of 2009 the rate of decline began to slow and then ultimately we returned to inflation late last year. So, as the second half of 2010 progresses the higher base effect will begin to play a role in making year-on-year growth that much tougher to achieve. Secondly, since August 2009 there has been a lack of interest rate cutting with only one further half a percentage point cut this year. The impact of last year’s five percentage points’ worth of interest rate cuts should begin to wear thin on demand growth which would ultimately begin to feed through to price growth.

Debt limiting growth potential

An exacerbating factor has been the relatively high household debt-to-disposable income ratio (still a high 78.4 percent in the first quarter), which has limited the household sector’s response to last year’s interest rate cuts.

We believe that year-on-year growth is near its peak and that as the year moves to an end we will see a deceleration of house price growth back towards single-digit year-on-year rates.

Article by: John Loos and Ewald Kellerman -