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FNB: property prices to decline further

07 Aug 2018

The average house price growth is likely to be slower than anticipated for this calendar year, with FNB forecasting another year of decline in house prices after taking in account the impact of inflation.

FNB is forecasting an average house price growth of 3.5 percent on the basis of house price data available for the first seven months of the year.

John Loos, a household and property sector analyst at FNB, said this was based on a gross domestic product forecast of 1.3 percent for this year, which was unchanged from last year.

Loos said that FirstRand expected slightly faster economic growth next year at about 1.6 percent, which would translate into a slightly faster average house price growth forecast of 3.7 percent.

He said the consistently negative real house price growth since early-2016 led FirstRand to believe that economic growth rates of 1 percent to 1.5 percent, along with little interest rate stimulus, were not be sufficient to create the level of housing demand that could mop up oversupplies, balance the market and lead to positive real house price growth.

Loos added that the longer-run performance of FNB's repeat sales house price index in real terms was at relatively expensive levels and 91 percent higher than the January 2001 pre-boom index levels despite the significant cumulative "post bubble correction".

The "bubble" refers to the pre-2008 housing bubble. Loos said the "post bubble correction" to date had come in two phases, with the first a sharp decline in real house prices of -21.2 percent from the all-time high in August 2007 to July 2009.

He said that there was a period of mild recovery between August 2009 and February 2015, with cumulative real house price growth of 4 percent, but that this mini recovery occurred on the back of massive monetary and fiscal stimulus packages, both globally and locally, that had been aimed at ending the 2008/09 recession and global financial crisis.

In South Africa, the Reserve Bank implemented major interest rate cuts at the time, with the prime rate dropping from

15.5 percent in late 2008 to 8.5 percent by mid-2012. Loos said that the global and local stimulus had helped the economy recover moderately and that the stimulus helped economic growth recover to 3.3 percent post the 2008 recession peak.

However, Loos said the stimulus began to wear off from 2012 and economic growth began a broad stagnation and interest rates started to drop from early 2014 until early 2016.

Loos said these events led to the start of the second phase of the post bubble correction, resulting in real house prices to date declining cumulatively by -2.5 percent since February 2015.

But Loos said that with consumer price index inflation being very low, the real house price correction had been slow in recent years.

Loos added that it was important to watch the House Price-Residential Rental Ratio Index, because if house prices rose too far above rentals, a relatively cheap rental market would ultimately become more attractive relative to home buying.

This would reduce home buyer demand as more households chose the rental option, he said.

Loos said the rental market was also mired in mediocrity in a weak economy, but there had been a -2 percent decline in FNB's Price-Rent Ratio Index since the post recession high reached in May 2006, with the index 11.86 percent lower than in January 2008.

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