Sluggish house price recovery loses momentum
And that leaves me with the tricky task of finding a “bridge” from Super 15 Rugby to the state of the domestic property market. The best I could come up with was that cheering for either the Lions or residential real estate has been a waste of time these
FNB should be commended for their efforts to put a positive spin on the residential property market. Their latest offering begins with the line: “Year-on-year house price growth accelerated further in June, but month-on-month we are seeing further loss in growth momentum.” The year-on-year performance to June 2012 topped 8.9%, the highest since June 2010. Although the acceleration they talk about seems nearer the 60cc Go-kart I drove on Friday than a Formula 1 car, the 2.7% real house price growth over the past year is worth celebrating. But the next revelation quickly undoes this “feel good” sentiment.
“We have begun to see a gradual loss in house price growth momentum since a revised peak in January 2012,” observes FNB Household and Property Sector Strategist, John Loos. “From a peak of 1.65% in January, month-on-month seasonally-adjusted house price growth has slowed to 0.82% by June.” What does this mean? It means house prices are not likely to show more than 2.7% real growth for the full year. It also suggests South Africa’s economy is slowing. Real economic growth on a quarter-on-quarter annualised basis slowed from 3.2% (Q4 2011) to just 2.7% in the first quarter 2012.
You have to consider house price movements over extended timeframes to appreciate the value in this asset class. The FNB House Price Index hit a peak in February 2008 at the end of a “boom period” for house prices. Real house prices have fallen 12.6% since – though we can find solace in the longer-term view. Real house prices are 70.2% to the good since the index’s inception in July 2000, an annual compound growth (after inflation but before expenses) of some 4.5%.
A word from the trenches…
There are many ways to assess housing market trends. FNB provides interesting statistics from the front line of the property industry through their Valuers’ Market Strength Index, which reflects their valuers’ perceptions of market strength. This measure remained virtually unchanged at 45.93 points in June 2012. “Our valuers have perceived the market to have strengthened during the summer of 2011/12, but the pace of improvement in the market has slowed in recent months,” says Loos. Another front-line indicator comes from their Q2 2012 Estate Agent Survey. The survey confirms a “slightly more negative view of the domestic residential property market.”
What can we expect from house price for the remainder of 2012? And will we ever see a return to the “boom times” experienced between 2002 and 2007? Not likely! Loos observes that economic data released in recent months points to a housing market that is once again headed for a ‘softer patch’. House prices mirror sentiment in the domestic economy – and a raft of statistics suggest local GDP growth will come under pressure going forward.
Retail sales slowed to 4.7% year-on-year to April (from 5.9% previously), manufacturing PMI has declined in each of the last three months and mining production declined by a massive 10.6% year-on-year to April! As is often the case in the world of economics the good news is the bad news. Slower economic growth means there is less inflationary pressure, with the result interest rates will stay on hold. The Consumer Price Index declined in May to 5.7% (from 6.1%). “All considered, therefore, a weakening economic environment, coupled with no new interest rate stimulus (reduction), suggests that the recent slowing trend in month-on-month house price growth will continue in the near term,” concludes Loos. “And that this will soon translate into slowing year-on-year house price growth”.
Editor’s thoughts: Your primary residence can play an important part in your long-term wealth accumulation strategy. Your house value should grow at rates in excess of inflation provided you “hold” the property long enough and manage to avoid the pitfalls linked to property ownership… One of the issues that must be addressed is the inflation-plus annual increases in costs associated with property ownership. How do you advise your near-retirement clients about the likely impact of rising municipal rates and water and electricity costs linked to their primary residences? Add your comment below, or send it to [email protected]
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