FNB: House price decline drops at steady pace
October 1, 2009
The FNB house price index's year-on-year decline continued to diminish at a steady pace, and it looks likely that year-on-year price increases will resume in the next few months, according to the latest FNB House price index released on Thursday.
The deflation rate for September was -4.4 percent year-on-year, significantly less than a revised August rate of -6.5 percent. At this rate, year-on-year deflation will probably be a thing of the past before year-end, FNB said.
This diminishing price deflation trend is a strong sign that the positive impact of 500 basis points' worth of interest rate cuts since December 2008 is starting to be felt in terms of residential market performance, said FNB analyst Ewald Kellerman.
"It is becoming clearer that the recent months' diminishing price deflation is indeed the start of a trend back towards price inflation, following on an improving trend in demand and transaction volumes, which started earlier in 2009."
Kellerman said the improvement in the market to date had been very much due to interest rate cuts, which had improved the household sector's ability to service debt.
However, there has been no real help from the economy, which remained in recession until very recently, exerting huge pressure on household disposable incomes, noted Kellerman.
FNB said it remained of the belief that the smaller '2 bedroom and less' market segment should be more cyclical over time than the 3 bedroom market.
This is because the smaller-sized segment is more the target of first time buying as well as buy-to-let buying, more cyclical demand types than the established family demand which would probably dominate in the 3 bedroom market, it said.
According to the index, the most recent quarterly house price numbers expressed according to number of bedrooms still appeared to support this view.
In the sectional title market, the 3 bedroom segment showed year-on-year price inflation of +0.1 percent in the 3rd quarter, still slightly better that the 2 bedroom and less segment's -0.5 percent.
However, the 2 bedroom and less segment appeared to have been turning already, reflecting its greater sensitivity to cyclical changes, while as yet the 3 bedroom segment still showed weakening price inflation.
"There has been an increase in residential demand in recent times, mostly driven by a series of interest rate cuts."
"However, this strengthening in demand has been slow and moderate, because against interest rate cuts the country has had the spectre of declining real household income, caused by the combination of job loss, deteriorating discretionary remuneration, and weaker investment income flows to households in tough economic times," said Kellerman.
"Therefore, as yet it would not appear that oversupplies of property on the market have been entirely eliminated."
With regard to the economy, Kellerman said there have been some early signs of levelling out, with the SARB Leading Business Cycle Indicator starting a rising trend during recent months after a major decline in 2008.
It is conceivable that economy-wide production could be showing some signs of stabilising, and that the 3rd quarter may have seen the end of the recession, noted Kellerman.
"However, we continue to emphasise that the platform off which the USA hopes to launch its economic recovery doesn't appear very stable, with that country's various debt and debt-service ratios still at or near the highest levels in history."
"In SA, too, the household debt to disposable income has made little downward progress, due to incomes being under huge pressure and making debt reduction slow going."
Realistically, therefore, while we expect to see a move back to house price inflation in 2010, the expectation is that average price inflation for next year will be moderate at around 5 percent, concluded Kellerman. - I-Net Bridge
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