House price inflation decline slows in November

The average house price growth slowdown continues, with the November FNB House Price Index recording a year-on-year rate of increase of 3.8%. This is only slightly lower than the previous month's revised rate of 3.9%, reflecting a recent slowdown in the pace of decline in price growth in recent months. It is possible that the slowing pace of decline is reflective of some additional stimulus that the Reserve Bank (SARB) has given to the market through its interest rate cut in September, while the November rate cut would only be reflected in the numbers in coming months. The average price for November was R787,530.

It is far too early to say whether the slowing pace of decline in the FNB House Price Index rate of increase is an indication that the residential property market is starting to turn for the better. Certainly our FNB Valuers' Market Strength Index suggests that our group of valuers doesn't perceive an improvement yet.

However, certain key economic indicators suggest that we may be in for a few months of improved performance. Firstly, after a lengthy pause since March, the SARB resumed interest rate cutting in September, and we have had two consecutive half a percentage point rate cuts in September and November, which we would expect to have a mildly positive impact on residential demand in the short term.

Furthermore, the SARB Leading Business Cycle Indicator has started to rise month-on-month recently, suggesting that after a few recent quarters of economic growth slowdown, SA may be in for a near term growth improvement. This obviously has the potential to support slightly stronger household sector income growth.

The mild turnaround for the better in the SARB Leading Indicator is probably the result of a combination of key global leading indicators pointing towards short term improvement in global economic performance, while locally the September interest rate cut would have made a difference. The Leading Indicator is normally closely correlated to trends in the value of new residential mortgage loans granted.

Therefore, we believe that, at present and in early-2011, we should be experiencing a short term mild improvement in residential demand even when the usual seasonal factors are excluded.

However, we continue to be cautious in our expectations of the medium term, i.e. 6 months to a year from now. The reason is that there are signs that the domestic consumer rice inflation rate may be at or near to the bottom of its cycle. Residential rental inflation is beginning to tick up (a major component of the CPI), while improvements (declines) in the rate of global commodity price inflation and the trade-weighted rand have slowed. While inflation is far from being a problem at this stage, the possibility of a flattening out and a gradual upward turn in 2011 may mean a lack (if any) of further interest rate cutting from here onward, and thus the resumption of a somewhat "flat" market.

The key longer challenge for the residential market remains in the area of a high household debt-to-disposable income ratio (78.2% as at the 2nd quarter), and how to get this ratio down. Household sector credit growth remained on a gradual strengthening path in October, rising further from 6.3% year-on-year in the previous month to 6.6%, driven more by the likes of instalment sales credit growth and "other loans and advances" than by mortgage loan growth. This gradual rise in household credit growth looks set to restrict the pace of decline in the debt-to-disposable income ratio. The still-high household debt ratio, unfortunately, leads us to expect another pedestrian year in 2011 for residential property, following a very mild short term uptick.

Article by: John Loos -