Confidence sees market improving

What is the latest? Following relatively pedestrian growth in the median property price over the past few months, July marked the first month of real growth in the sector. The median house price increased by a further 0.8% m/m in July (2.3% m/m in June), marginally above the average monthly increase of 1.2% recorded since the start of the year, signalling an improvement in both demand and supply fundamentals. Thus, the median house price increased to R597 160 from a revised R592 500 in June, representing an increase of 7.3% y/y from 3.2% y/y in June. Although this increase is sharp, it needs to be borne in mind that this improvement is from a very low base this time last year, when the median price contracted by around 5%. In real terms, the median price jumped to 3.2% y/y from -1.0% y/y in June, in part also due to the falling inflation profile. Standard Bank expects inflation to moderate to 3.9% y/y in July from 4.2% y/y in June.

Our view: Today's data provide confirmation that the recovery in the property market is gaining traction. This improvement was expected, especially since the low base levels in the second half of last year were set to buoy growth in the second half of this year. However, fundamentals are also improving, mirrored by increasing discretionary spending, such as passenger car sales which rebounded to 27.6% y/y in July from 14.4% y/y in June. Indeed, it was previously signalled that weak employment conditions, poor income growth and high debt levels have contributed to both weak demand and hesitant credit supply conditions. This by no means suggests that the employment environment is improving sufficiently to boost property growth just yet, but the rate of deterioration is slowing. Moreover, as mentioned in the previous report, households are beginning to shed debt in arrears that have gnawed at real disposable income, providing increased scope for discretionary purchases. With the market remaining affordable from both an inflation and borrowing cost perspective, further improvements are envisaged. At the current rate of improvement and factoring in seasonal effects, the market is set to show average nominal growth of around 6% this year, and 1.2% in real terms. The outlook over the next year or so, however, remains clouded by external growth concerns. A below-trend growth rate in economic activity suggests that new avenues for property growth via increased employment or speculative buying will be limited, and that growth is likely to remain organic.

Trends to be aware of: The improvement in the median house price financed in part reflects confidence of future growth in prices. Housing market confidence can be proxied by expectations of future price growth, as inferred from the house price component in the consumer price index. While actual rentals and implied rental prices (owners' equivalent rent1 (OER)) have been on a declining trend since the start of 2009 (see Figure 2 overleaf), growth in actual rentals has fallen below the respective OER component of flats and townhouses since the middle of last year, and more recently for houses too. Falling rental inflation in part signals the weakness in employment conditions, and partly excess rental stock following the massive buy-to-let buying spree a few years ago. However, home owners' own assessment of potential rental income is improving relative to actual rental inflation, providing tentative signs that confidence in the property market is slowly returning.

Outlook: The property market recovered further in July, marking the first real price increase since mid-2007. While several headwinds to growth remain, such as weak employment market conditions, slowing economic growth and rising administered prices, confidence in the property market is returning. Standard Bank expects the second half of the year to yield higher growth in the median price, with average nominal growth envisaged at around 6% for the year.

Figure 1: House price growth

Source: Standard Bank Group

Figure 2: Owners' equivalent rent and actual rental price growth

Standard Bank median house price growth - y/y %

Article by: Danelee van Dyk from Standard Bank.