Prices to fall again?

The FNB House Price Index continued its trend of slowing year-on-year price growth, from a July revised rate of 10.1 percent to an August rate of 7.2 percent. While the declining price growth trend was expected, the pace of the decline has been slightly faster than our expectations. Base effects do play a role, with the base in the second half of 2009 having begun to rise once more. However, the weakening also has much to do with a slowing global and domestic economy as well as a lack of further interest rate stimulus over the past 12 months (only one further rate cut in March 2010). The positive impact of the five percentage points’ worth of rate cuts from December 2008 to August 2009 has thus started to wear thin.

A lack of interest rate cuts aside, we are increasingly concerned with events playing themselves out in the world’s largest economy, the United States. Massive monetary and fiscal stimulus packages in recent years have seemingly done very little to boost that country’s economy, which has been slowing again in recent times. Its unemployment remains high, its consumer confidence low and the risk of the so-called "double-dip" recession must surely be seen as very high at present.

This has implications for our own economy and housing market. Already, we have seen a slowing month-on-month growth rate in the SARB Leading Business Cycle Indicator since late- 2009 and, more recently, SA’s second quarter economic growth slowed too. By how far our economy, and thus our housing market, will slow will depend much on the global economic situation, with the US being key. But domestic housing and household sector fundamentals make us vulnerable, and this to will also be a major factor. The FNB Valuers’ Market Strength Index for July continues to point to an imbalance between demand and supply, with the aggregate supply rating by our valuers still being stronger than their demand-side rating. The FNB estate Agent survey estimates average time of a property on the market to be a lengthy 17 weeks and one day, supporting the valuers’ view that demand is weak relative to supply despite a 2009/early-2010 "mini-recovery".

In addition, the household sector debt-to-disposable income ratio at 78.4 percent is high by our historic standards, which has prevented the household sector from responding strongly over the past year-and-a-half to lower interest rates.

The reality is, therefore, that our housing market starts its slowdown off a very weak base. It may still be in a better position than the US Housing Market at present, because unlike the US, where interest rates are almost zero, the SARB does have ammunition in store to cushion the blow of a global economic slowdown.

However, a disappointing US economic performance, the very real risk of a double-dip recession and our own weak domestic housing fundamentals have led us to a downward revision of our house price growth forecast. We "pencil in" some renewed decline in the FNB House Price Index in 2011 after an average projected growth rate of +6.4 percent in 2010.

As yet, there isn’t reason to believe that the decline need to be extreme, such as was the case in the US during the last slump, with that country’s national house price deflation rate bottoming at near to -19 percent, because the likelihood of some renewed SARB interest rate cutting in September can provide some support. But it is the unfortunate reality that SA is an open economy, highly exposed to global economic events and the magnitude of the housing market slowdown does very much depend on the magnitude of the global slowdown.

Article by: John Loos and Ewald Kellerman from