House Price Growth Continues To Reflect Gradual Decline In Real Terms

The FNB House Price Index continues to hover in low single digit growth territory not too far from 4% year-on-year. On a year-on-year basis, the index's growth rate accelerated slightly to 4.2% in November, from a slightly lower revised 4.1% rate in October.

The low single-digit growth in nominal terms continues to translate into a year-on-year price decline in "real" terms, when adjusting for Consumer Price Index inflation. This means that the gradual housing market price "correction" continues, as it has since early-2016.

As at October 2018 (November Consumer Price Index not yet available) real house prices declined year-on-year by -0.9%, with Consumer Price Index inflation at 5.1% and house price growth at 4.1% in that month.

Longer run real house price performance

Examining the longer run performance of the FNB House Price Index in real terms, FNB still sees it at relatively high levels, 88.9 up on the January 2001 "pre-boom" index level, having risen sharply in that pre-2008 boom period.

The cumulative real decline since the peak of that pre-2008 boom period, reached in August 2007, has been -20.8%. FNB does not believe that this cumulative real price correction to date has been sufficient to bring real home values back into line with what are now very weak economic fundamentals.

FNB valuers perceive the broad market slowing trend to be continuing 

FNB's valuers continue to point to housing demand weakening, and with it the demand-supply balance as reflected in a declining FNB Valuers' Market Strength Index (explanatory notes at the end of the report).

This appears to explain the ongoing house price decline in real terms.

The FNB Residential Demand Rating declined by -1.2% on a year-on-year basis in November 2018.

The FNB Housing Supply Rating has been rising year-on-year, recording a +2.6% rate as at November.

These movements in demand and supply translate into a further decline in the FNB Market Strength Index by -2.1% year-on-year, to reach a reading of 49.61, keeping it below 50 for the sixth consecutive month. This below-50 reading means that valuers now rate residential supply as stronger than demand.

Nearing the end of 2018, and with one month's house price data remaining, it appears likely that the average house price growth rate for 2018 will be slower than that of 2017, and be the fourth consecutive year of average price growth slowdown.

The year-to-date average growth rate for 2018 is 3.7%, which is slower than the 4.3% of 2017, and noticeably slower than the 6.8% high reached in 2013, just before that start of interest rate hiking early in 2014.

Turning to 2019, FNB projects nominal average house price growth to be 3.7% for next year too, i.e. very similar to the 2018 likely outcome. Given an FNB Consumer Price Index inflation projection of 5.3% for next year, this would translate into another year of house price decline in real terms.

FNB does foresee slightly better (but still weak) economic growth of 1.4% in 2019, compared with 0.7% for 2018. Against this, however, a further interest rate hike is projected in 2019 after the late-2018 hike. This is expected to cause slightly more conservative property spending in 2019 in what is always a highly credit-dependent market. Mild rate hiking, therefore, is expected to offset the mild support for the housing market coming from a slightly stronger economic growth forecast next year.