FNB House Price Index for May releasd

In real terms (adjusting house prices for general inflation in the economy using the CPI), as at April we were still seeing very slight year-on-year decline to the tune of -0.4%, with consumer price inflation at 5.86% year-on-year in that month still slightly higher than house price inflation.

Evaluating longer term performance of the FNB House Price Index, in real terms the index is -19.2% down on last decade's real price peak reached in November 2007, while in nominal terms it is a mere 14.9% higher.

However compared to May 2003, 10 years ago, the index is up 49.8% in real terms and 151.9% in nominal terms, suggesting that the price effects of last decade's residential demand boom have far from worn off, despite a significant downward real correction since late 2007.

Recent relative market strength

Turning to the FNB Valuers' Market Strength Index, FNB's Valuers have indicated that recent relative market strength has been the result of the combination of positive residential demand growth as well as a little more constrained supply of residential stock on the market.

Since early 2012, the FNB Valuers' Market Strength Rating Index has shown gradual positive year-on-year growth after a 2011 decline. It remains below the crucial level of 50, at 46.33, implying that the residential demand rating at 49.5 is still weaker than the 56.8 Residential Supply Rating, arguably explaining why we have not yet seen strong house price growth in real terms.

On a month-on-month seasonally adjusted basis, however, we have seen the valuers perceiving positive month-on-month growth in demand and month-on-month declines in supply in recent months, narrowing the gap between supply and demand.

Namibia stronger than SA

In the second-largest economy within the Common (Rand) Monetary Area, i.e. Namibia, our FNB Namibia Average House Price shows a slightly better situation than in South Africa. Namibia has experienced a stronger economic growth rate than South Africa in recent times. In addition, its major residential market, Windhoek, experiences significant vacant land constraints and, thus, more constrained supply, it would appear, than SA's cities.

The apparent result is that, while the shape and direction of Namibia's cycles don't look too dissimilar to SA, the magnitude of its house price growth has been better of late, with its first-quarter average house price growth estimated at 15.8%, impressive compared to South Africa's lower 5.2% as at the first quarter of this year.

The broadly improved period of domestic house price growth since late 2011/early 2012 is not totally out of kilter with economic and housing market developments in the world's largest economy through last year and early-2013, where March saw the US Case-Shiller House Price Index reaching growth of 10.9% year-on-year, after a steady acceleration from a state of negative growth back in 2011.

But there are recent some ominous signs emerging for the local residential market emanating from a somewhat "pressured" domestic economy. In foreign currency-denominated terms, the FNB House Price Index reflects a very different picture, i.e. a domestic residential market dropping in value, as a result of a steady recent deterioration in investor sentiment, which has seen a major weakening in the rand.

SA property cheaper for foreign buyers

In dollar terms, the May FNB House Price Index declined year-on-year by -6.9%, in euro terms by -8.4%, and by -3.4% in UK pound terms. South African property has, thus, recently become significantly cheaper for aspirant foreign buyers. Will this attract a higher number of foreign buyers? This remains to be seen, but this is not expected, as the cheaper domestic property is a result of a deterioration in investor sentiment, it would seem.

The key data release in May which has a bearing on residential buyer purchasing power growth was first-quarter Stats SA GDP (gross domestic product) data. This revealed a very disappointing quarter-on-quarter annualised real GDP growth rate of 0.9%. This, in turn, had a negative impact on the estimated total employee remuneration (wage bill) growth, which slowed in nominal terms to 7.4%. This is the lowest nominal wage bill growth rate since the final quarter of 2001 and is now well down on the post-2008/9 recession "Relief Recovery" peak of 13.3% reached in early 2010.This suggests still further slowdown on disposable income growth early in 2013, which probably largely explains the recent steady deterioration in consumer confidence.

The other key event that took place in May, and which relates strongly to residential property demand, was the Reserve Bank (SARB) decision to leave interest rates unchanged with its repo rate at 5% and prime rate at 8.5%, thus offering no additional demand stimulus since the third quarter of last year. The combined impact of no interest rate cutting as of late and slowing wage bill growth could have negative implications in terms of growth in residential demand in the near term, with many economic agencies recently revising economic growth forecasts downward, and growth below 2% looking an increasing possibility for 2013.

Certainly the SARB governor emphasised that growth forecasts risks were very much to the "downside", and CPI inflation forecast risks to the "upside", with bad labour relations and high wage demands posing threats to both growth and inflation. The current level of interest rates set by the SARB is at multi-decade lows, and indeed the stability of interest rates at these low levels has helped to gradually strengthen residential demand.

But it is questionable whether this residential demand strengthening can continue at a time of such economic weakness and where we have already seen a steady slowing in growth in the area of real consumer demand as a result.

Granted, a still-slow rate of growth in residential buildings completed keeps supply growing at a slow pace, but a weak economy and resultant weakened disposable income growth leads to the ongoing expectation that house price growth will continue to remain largely in single-digit territory in the near term, due to potential pressure on demand, not far outpacing consumer price inflation of near to 6%.

Download the FNB House Price Index for May 2013