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This house price blitz has at least two years to run

14 January 2011 Gareth Stokes
Gareth Stokes,FAnews Online Editor

Gareth Stokes,FAnews Online Editor

There are more depressing ways to begin the New Year than by paging through the December 2010 FNB House Price Index. Spare a thought, for example, for the thousands of homeowners in Queensland, Australia, and the hundreds along the banks of South Africa’s

John Loos, FNB property strategist, says the year-on-year rate of growth in the FNB House Price Index settled at 3.6% in December 2010, unchanged from November. After allowing for consumer price inflation the average “real” house price growth through November and December last year was close to zero! He concludes it’s best to examine 2010 as a whole and take what solace you can from the 6.7% nominal improvement in average house prices over 2009.

A good year – but not a “very” good year

After stripping out the rather benign (by South African standards) inflation rate your home was worth a whopping 2.3% more on 31 December 2010 than a year previously. It’s hardly the type of investment you want to be lining your pension pot with. Says Loos: “Last year was a tale of two halves… We enjoyed acceleration in average price growth in the first half in response to massive interest rate cuts through 2008/9 – while the second half showed a deceleration in price growth in response to the SARB putting the brakes on the pace of its interest rate intervention.”

The bust – to boom – and back to bust cycle exhibits perfectly on a graph of the FNB House Price Index going back to January 2002. If we zoom in on the last four years of data we can discern a clear downward slope beginning December 2007, bottoming in April 2009, and climbing until May 2010. Since then the “growth” rot has set in once again. “The two successive interest rate cuts in September and November may have given the market a slight impetus through the summer months, but the residential market’s fundamentals still have much improving to do before we’ll see any sustained turnaround in house price growth,” says Loos.

House price cycles tend to play out over periods of years rather than months and the mini-recovery through the first half of 2010 should be viewed in context. It will probably take a number of years for the excessive valuations created by five years of real house price growth to unwind. The bottom line is homeowners shouldn’t expect major improvements in property values through 2011.

Roll up your sleeves and get ready for another tough year…

You can still make money from real estate, but you’re going to have to work for it. “Certain indicators suggest that 2011 will be another year of hard work for the residential property-related industries,” opines Loos. He underpins this sentiment by considering the FNB Valuers Residential Market Strength Index, which assesses the domestic real estate market on the Economics 101 concept of supply and demand.

It’s an interesting graph based on every valuation an FNB valuer carries out. Loos explains: When an FNB valuer values a property, he/she provides a single rating of demand and supply for property in the specific area. The valuer assigns the property (+1) if supply / demand is good, (0) if neutral and (-1) if weak. The supply / demand statistics are aggregated before the aggregate supply rating is subtracted from the aggregate demand rating to form a collective opinion – the “gap” between buyers and sellers if you like. The collective opinion of the FNB valuers is that demand relative to supply has weakened from -0.19 in November to -0.2 in December, confirming the weakening trend in the FNB Market Strength Index!

All things being equal this gap will probably widen through 2011. The South African Reserve Bank Q3 2010 bulletin reports household debt to disposable income at a still high 78.5%... With limited chance for further interest rate cuts and the growing likelihood of additional inflationary pressures its unlikely this indicator will improve markedly in the near term. And until consumers shake off their debt woes chances for strong house price growth are limited.

Editor’s thoughts: I’ve read plenty of articles on the house price cycle in developed economies such as the UK and US. Although long-term statistics for South Africa are more difficult to come by it seems our market echoes their multi-year boom-to-bust cycles. If this is the case the house price blitz could continue through 2011 and 2012. Would you agree house prices could stay in the doldrums for another two years, beginning January 2011? Add your comment below, or send it to

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