Slow economic growth puts the squeeze on house prices
Economists say that South Africa will be lucky to achieve 2.5% GDP growth this year. And the outlook for 2013 seems to worsen with each passing month. The domestic economy has little hope of returning to its mid-2000s 5% per annum growth until the US and
John Loos, Household Sector Strategist at FNB Home Loans says the slowing growth in South African residential house prices – as evidenced by the group’s July 2012 House Price index – mirrors the subdued economic conditions. “The index showed a slight decline in its year-on-year growth rate in July, from a revised 8.4% rate in June to 8.3%,” said Loos. “This slowing growth rate has been anticipated in recent months due to the fact that the month-on-month seasonally-adjusted growth rate has been losing steam since its January 2012 peak”.
Homeowners must find solace in pedestrian real returns
All is not lost for South African homeowners. The dire economic outlook prompted the South African Reserve Bank to drop the Repo rate by 50 basis points in July, bringing welcome relief to mortgagees. Local banks responded by dropping their prime lending rate to just 8.5%, the lowest on record since 1973. House prices have also improved in real terms (although only slightly) thanks to June 2012 inflation coming in at a moderate 5.5%. “In real terms, adjusted for June consumer price inflation, the index showed slight year-on-year growth of 2.7%,” said Loos.
Another plus for domestic homeowners is that the house price dip experienced in South Africa is mild compared with the US , UK and other developed world economies. House prices in the US have dropped by a third since their 2006 peak (as measured by the Case Shiller House Price index). The decline in real house prices since South Africa’s February 2008 peak is a mere 12.4%. Real house prices are also 70.6% higher than when the FNB House Price index first reported, back in July 2000.
Defining and measuring average house prices
FNB used its July 2012 House Price index release to expand upon the methodologies applied in its calculation thereof. The main difference between the FNB index and other “simple average” house price indices is that it can be regarded as a “fixed weight” average house price index. What does this mean? Property economists have long been concerned that volume and price mismatches result in an average or median price index rising or declining without any genuine movement in capital valuations. If, for example, the number of property transactions in a cheap residential area double from one month to the next – while the transactions in other segments remain unchanged – the national average house price would be dragged down...
“In an attempt to reduce this effect, FNB decided to fix the weightings of our House Price index’s sub-segments in the overall national index,” says Loos. He admits this is only a partial solution, as activity shifts can still take place between smaller segments within the sub-segments. The index remains one of the most comprehensive measures of house price movements in South Africa and is built around fixed weightings (based on relative transaction volumes over five years) of 10 housing sub-segments. These weightings are applied as follows:
Sectional title properties
- Less than 2 bedrooms (Weight – 0.0718)
- 2 Bedrooms (Weight – 0.2106)
- 3 Bedrooms (Weight – 0.101)
- 4 Bedrooms (Weight – 0.0031)
- More than 4 bedrooms (Weight – 0.0002)
Full title properties
- Less than 2 bedrooms (Weight – 0.053)
- 2 Bedrooms (Weight – 0.1092)
- 3 Bedrooms (Weight – 0.3561)
- 4 Bedrooms (Weight – 0.0811)
- More than 4 bedrooms (Weight – 0.0139)
Economic indicators point to a “struggle through” scenario for house prices
The myriad macroeconomic indicators relied upon by economists point to a “struggle through” scenario for the domestic economy. South Africa’s GDP growth came in at only 2.7% in Q1 2012 and the second quarter result is likely to be worse. In recent months the Reserve Bank Leading Indicator (an index comprising a dozen economic measures) and global purchasing managers’ indices have shown declines, while real domestic retail sales growth is contracting too. “Some may argue that the July interest rate cut will breathe life into the residential market,” says Loos. “It will be a minor stimulus, and we could see a slight acceleration in month-on-month house price growth.” But the 50 basis point cut will not totally offset the negative impact of a slowing economy.
“While house price growth on a year-on-year basis is still at a relatively healthy level of 8.3% it is likely that the above-8% levels of recent months reflect the peak in a short-lived resurgence in house price growth,” concludes Loos. FNB Home Loans expects house price growth to slow further in the near term. Homeowners can expect year-on-year growth to come in at around 6% by year end.
Editor’s thoughts: South Africa’s National Growth Plan 2030 resurfaced with much fanfare at the end of July 2012. It outlines a broad plan to reduce poverty and unemployment over the next 18 years. Although well received the plan contains a number of proposals that have yet to be thrashed out by the political stakeholders. And economic growth may well take a back seat as politicians argue the plan rather than implement it… Are you concerned about the impact of slow economic growth on investment returns and residential real estate prices? Please add your comment below, or send it to gareth@fanews.co.za
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