FNB – year-on-year price change edges towards deflation

JOHANNESBURG (October 01) - The September FNB House Price Index released today showed only slight year-on-year house price inflation to the value of 1,8%, compared to a revised 2.9% in the previous month, edging closer to the seemingly inevitable spectre of deflation.

On a month-on-month basis, price deflation has been a reality since early in the year, and a further –0,1% (-1,14% annualised) was recorded in September.

In real terms, the recently low house price inflation rate, and contrasting high consumer price inflation rate, translates into a year-on-year real house price deflation rate of -9.5%.

However, John Loos, property strategist at FNB , says this does not yet imply that there is a conclusive improvement in affordability for everyone.

“With interest rates now looking set to move sideways, average wage inflation accelerating to catch up with consumer price inflation, and no average house price inflation to speak of, affordability in terms of the average house price/average income ratio is improving, as too would be the instalment repayment value on a 100% bond on an average priced house/average income ratio.”

However, Loos adds, the catch is that this improvement in affordability refers to those who remain employed throughout the economic downturn. “But the economy may already be at a stage of net job losses in the formal sector, and this situation will partly offset any possible improvement in interest in the residential property asset class as a result of improving affordability for regular income earners.”

“In short, therefore, given a slowing economic growth rate and slow real household disposable income growth for the household sector as a whole, we are not yet necessarily at the stage where an increasing number of people can afford the average priced house, despite the already-substantial decline in real house prices.


While the market deterioration spans all price segments of the market, Loos believes that the lower-priced end may now be deteriorating faster than the higher priced segments.

“The higher priced end of the market has led the cycle through the current decade, and may be nearer to the end of the downturn than the more affordably priced segments which have held up better for longer. But in recent times the lower priced end is believed to have been suffering more from high consumer price inflation which has been food and transport-driven, and a greater percentage of sellers amongst lower income groups are believed to be selling in order to downgrade due to financial stress.

Some Estate Agents surveyed in FNB’s Residential Property Barometer shortly after National Credit Act (NCA) implementation have also indicated that the NCA has effected lending to lower income groups more significantly than their higher income counterparts.

Greater lower income group stress is believed to be slowing volumes of activity in some of the lower-priced segments at a faster rate than the already-weak higher end, and the resultant relative shift in activity levels up the price ladder may be playing a role in preventing the overall average price index from showing year-on-year deflation to date. A steadily rising average time period that houses remain on the market also partially masks weak market conditions, as many sellers choose to hold on longer for their desired price.


With prices already declining month-on-month, it is believed that a period of year-on-year price decline in the FNB House Price Index is almost a foregone conclusion, arising within the next month or two and continuing until early next year. This is the consequence of a sharp drop in demand, driven largely by declining real disposable income growth and rising debt servicing costs.

Loos sees some encouraging signs emerging in the form of declines in petrol prices as a result of oil prices falling, and consumer price inflation is believed to be around peak levels, soon to decline. In addition, the household debt situation has begun to improve, with the debt-to-disposable income ratio declining in the second quarter.

However, as yet these early signs of improving household “fundamentals” are not believed to be sufficient to turn the market around. That is anticipated around April next year when the first interest rate cut is expected to arrive.

Editors Note : The FNB House Price Index is constructed* using the average value of housing transactions financed by FNB. In order to eliminate outliers from the data sample, transaction values must BE above 70% of FNB Valuations Division’s valuation of the property but below 130%, while purchase prices recorded as above
R10m. A statistical smoothing function is applied to the data.

Article by: John Loos - www.fnb.co.za