FNB’s valuers, in their FNB Valuers Market Strength Index (MSI) may in part explain the recent uptick in house price inflation.
Examining the Demand, Supply and MSI itself, which reflects the difference between Demand and Supply, we see a still very well balanced residential market.
The Valuers’ Residential Demand Rating was at a level of 55.8 in November (scale 0 to 100), while the Supply Rating was at a lesser 52.92. This translates into an MSI of 51.44, with the level of above 50 implying that residential demand is still stronger than supply. Positive real house price growth under these conditions is not surprising, therefore.
However, the rate of growth or decline in the indices is often more insightful. Examining the 3 indices on a year-on-year percentage change basis, we see that demand growth has been slowing steadily since early-2014. From early-to-mid-2015, however, this demand growth moved more or less sideways, while the Valuers perceived the pace of decline in residential supply to speed up. The net result was a slight rise (strengthening) in the MSI up to about mid-year.
On a month-on-month rate of change basis, one also sees significant fluctuations, with a mild 2nd quarter Demand and MSI uptick, along with supply decline.
It is likely that the recent uptick in the year-on-year house price growth rate is the lagged impact of that MSI strengthening about a quarter earlier.
The Valuers, however, seem to suggest that the MSI growth strengthening was short lived, with its year-on-year growth slowing once more, driven lower by slowing Demand growth.
This would suggest that the year-on-year house price growth uptick is likely to be short lived, turning down once more in the near term, in lagged response to a slowing pace of strengthening in the Residential Market.
We remain of the belief that the mild recent uptick in year-on-year house price growth will be short lived, and 2 months of slowing month-on-month house price growth, already, suggests that this will probably be the case.
There is very little to enthuse about economically, at present. Some key high frequency indicators released in November looked poor. In recent months, the Manufacturing PMI has returned to negative territory, new vehicle sales remain in sharp year-on-year decline, and electricity sales declined a further -3.8% year-on-year, now -7.2% down on a multi-year high reached in May 2011.
The SARB Leading Business Cycle Indicator for September, released in November, picked up downward momentum, declining year-on-year by -5.5%, the most rapid year-on-year decline since July 2009. And, of course, the SARB (Reserve Bank) raised interest rates mildly further during November.
With the risk of recession thus looming ever larger, there appears little to support average house price growth at currently positive real rates, as we head towards 2016. FNB’s Valuers already perceive Residential Demand to be slowing. A supply-constrained market, however, keeps a reasonable market balance for the time being.
Alan Straton
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