Spin the house price statistics as you please
The magic of statistics is you can spin them whichever way you please. If you’re writing about house prices – as we are – you can latch on to the positive in the story or the negative. And journalists aren’t the only persons guilty of this practice. Consider, if you will, the opening lines from the July 2011 FNB House Price Index press release. “The FNB House Price Index has experienced a mild acceleration in its year-on-year growth rate in recent months,” the paragraph begins – spinning positively. “From a June revised rate of 3.1%, the July growth rate moved to 4.6%, the highest rate of growth since August 2010!” Champagne corks and celebration then? Not so fast...
After adjusting for consumer price inflation (CPI) the year-on-year real growth rate for July is still in negative territory, to the tune of -1.8%. Price inflation – feared by those who rely on investment income through retirement – eats away at asset values too. The average Joe who spent R1 million on a house on 30 June 2010 would expect the property to be worth R1, 050, 000 today to compensate for inflation… But he’s probably going to have to settle for an amount of around R1, 130 000 instead! For those who purchase property for the long-term this gradual erosion of wealth is hardly noticeable. But a buy-to-let investor or property speculator will be unimpressed.
Home owners are going backwards – in real terms
A graph of the FNB House Price Index going back to January 2002 paints a rather depressing picture. During the housing market boom spanning mid-2003 to mid-2005 house prices grew at phenomenal rates... The turning point which occurred some time in 2005 passed virtually unnoticed because prices were still growing in real terms, albeit at more sedate rates. In February 2008 the real return on residential houses dipped below zero. And aside from a brief visit to positive territory through the first half of 2010 the outlook has been bleak ever since.
What’s really going on in the residential property market? FNB agrees there has been downward pressure on real prices going back to early 2008. “February 2008 represented the highest point (in real terms) in the FNB House Price Index’s 11 year history,” says John Loos, FNB Home Loans strategist. Since then we’ve endured three-years of tough economic conditions and a relatively weak property market. If we consider the 40-month period beginning February 2008 and ending 30 June 2011 we’re talking about a 14.7% decline in real house prices! As for the improvement in June, Loos observes: “The acceleration in the year-on-year rate of house price inflation is [ascribed to] the mild up-tick in residential demand during the summer as reflected in the FNB Estate Agent Survey.” Further impetus was due to the two 50 basis point interest rate cuts late in 2010.
The Economics 101 of residential property
Ask an Economics 101 student what drives prices in a free market and you’re guaranteed to be on the receiving end of a supply versus demand lecture. One of the most concerning features of the current housing market recession is the transaction volume decimation. Estate agents, attorneys and home loan originators are “closing” only a fraction of the deals they were three years ago. FNB illustrates this phenomenon in their FNB Valuers Residential Market Strength Index, which effectively subtracts aggregate residential supply from aggregate residential demand. It’s a simple system that works as follows: Each time an FNB Valuer values a property they provide a rating for each of supply and demand for the area in question (“+1 = good”, “0 = average”, or “-1 = weak”). Supply has outweighed demand since the middle of 2008 and has dipped further in recent months. “The ongoing weakness in the balance between demand and supply, as reported by our valuer panel, suggests that the residential market remains vulnerable to further downward adjustment in house prices, if not in nominal terms then at least in real terms,” concludes Loos.
A house price cycle can last anything between seven and 12 years. If we accept mid-2005 as the turning point then the earliest we can expect the turnaround is mid-2012. A great deal depends on the strength of the domestic economy – which Loos points out is very much in sync with trends playing out globally. The big debate raging on the economic stage at the time of the FNB release was the possibility of a US debt default. US deal makers have since come to a sensible compromise including lifting the US debt ceiling (till end-2013) and cutting some $2.3 trillion from the budget over the next decade.
This so-called recovery will be short-lived
“Default or no default, the fact is that US economic growth has already slowed to pedestrian pace, recording 0.4% and 1.3% quarter-on-quarter annualized real growth for the 1st and 2nd quarters of 2011,” says Loos. He reckons it will be tough for the US to avoid another recession. If the world’s largest economy stumbles it will have a significant impact on the rest of the world, including South Africa.
“Domestically, sharp increases in both global oil and food prices have been instrumental in raising our CPI to 5% year-on-year by June, causing many economists to anticipate that the next move in interest rates will be up,” he continues. And although an interest rate hike won’t necessarily impact the current weak housing market, one has to assume the house price growth recorded in July will be short-lived given the current economic backdrop.
Editor’s thoughts: It is difficult to make money from a residential real estate investment. Even during the boom times the price has to appreciate markedly to cover transfer duties, attorney fees, bond fees, bank interest, relocation costs – the list is endless… By the time you’ve balanced the books and annualised your growth over the period of your investment you’re probably in for a big shock! Is there money to be made investing in residential property? Please add your comment below, or send it to [email protected]
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