Lightstone house price inflation forecast to end at around 5.8%

In February 2014, Lightstone forecast that South African house price inflation will end at around 6.7%. Due to all of our major macro-economic assumptions holding true in 2014, the actual house price inflation experienced over the year was right on the money at 6.72%.
 
In 2015, we expect this to decrease to 5.8%. In the event of more favourable economic conditions this figure can edge up to 7.3% while adverse conditions could see house price inflation closer to 3.5%.

Movement’s in house price inflation since the 2008 can be divided into 3 periods. The housing market saw a recovery between 2009 and 2010 which peaked at 5.18% in June 2010. Risking a double dip recession, house price inflation decreased in the subsequent year and reached its lowest level in October 2011 at 2.55%.

The next 3 years saw a relatively prosperous period in the South African property market with stable growth in property prices, low interest rates and robust growth in the total value of issued mortgages. Deteriorating economic growth in 2013 and 2014 largely due to labour unrest seems to have filtered into the property market over the past 6 months. Lightstone forecasted last year that the property market would reach a peak in 2014. This prediction realised in the luxury value segment which peaked in the first quarter of 2014 at an annual inflation rate of 7.1%. The subsequent 11 month’s has seen a steady decline in this segment and was recorded at 5.3% in January 2015.

In general luxury house price inflation serves as a leading indicator of national inflation as seen below. Since 2000 there has never been a case where luxury house price inflation has not peaked or bottomed before national inflation further validating its predictability. It is therefore highly probable that national inflation will follow the same path over the next 12 months.

It is unlikely that 2015 will be the year where this trend is broken. This is supported not only by the signalling decline in the luxury value segment but also due to the forecasts of the major drivers of house price inflation.

The South African economic growth realized at 1.5% in 2014 and is expected to pick up to 2.5% in 2015. It is however currently unknown whether the labour unrest witnessed in the past two years will persist and reduce actual economic growth closer to that of 2014.

Inflation has also reduced significantly in the past 3 months due to decreasing oil prices. This however does not automatically bode for a reduction in interest rates. Government forecasts CPI at 5.9% for 2015 but lower oil prices can cause CPI to end up between 0.5% and 1% below this estimate.

Based on the forecast estimates of the main drivers of economic growth while taking into consideration movement in the luxury value segment, Lightstone forecasts that house price inflation will realize at 5.8% by the end of 2015.

In the event that the economy performs above expectation this figure could be closer to 7.3% due not only to higher economic growth but also the increase in inflation that usually follows it. It is however not expected that such an increase in inflation will be of the extent to move the monetary policy committee to significantly increase interest rates.

There is also the danger that labour unrest could persist leading to a reduction in economic growth and inflation. In the unlikely event that economic growth declines below the 1 % mark there exists a danger that house price inflation could end closer to 3.4% by the end of the year.