House Price Index inflation at 2.3%: FNB

The newly developed FNB House Price Index recorded 2.3% year-on-year price inflation in August, compared with 3.5% in July, thereby continuing its declining inflation trend, FNB said.

However, on a month-on-month basis, price deflation has already been in progress for six consecutive months since March of this year, recording -0.3% in August.

In real terms, adjusting the index for inflation using the CPI, year-on-year price deflation amounted to -8.8% in August.

FNB said the drivers of the weakening house price performance stretch far beyond just interest rate hikes. A rising household debt-to-disposable income ratio has contributed, along with rising interest rates, to rising debt service costs, while surging consumer inflation has been eating into disposable income.

On top of this, post-Polokwane (ANC leadership change) minority group jitters, the January Eskom crisis and the deteriorating Zimbabwe situation may have conspired to drive emigration rates higher as sentiment goes through a dip, FNB added.

FNB has also calculated a median price index for comparison purposes. After a period in which the median price inflation rate was below that of the average price inflation rate (from April 2006 to June 2008), a swing back to the median exceeding the average price inflation rate could signal the end of a period of shifting activity towards the lower priced end. FNB said it was no longer clear that the lower-priced end was outperforming the higher end as was the case up until recently.

FNB added it was important to understand that house price trends depicted in the indices did not show the full extent of residential market weakness.

Sellers are somewhat inflexible when it comes to dropping their asking price. Some would stay out of the market during these weak times, while others hold on longer to obtain their price, often incurring higher holding costs.

Simultaneously, new development completions are plummeting, also causing supply of stock in the market to adjust downward. Supply therefore partially adjusts downward to weakening demand, preventing house prices from falling to the extent that transaction volumes do.

"While month-on-month house price deflation is already here, year-on-year price deflation is expected to arrive soon. However, no ’freefall’ is anticipated. Rather, around -5% year-on-year deflation is expected at the worst part of the price cycle in the first half of 2009, before price inflation resumes late next year on the back of recovering economic growth and declining interest rates," FNB concluded.

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