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More house price pain

Johannesburg - The January 2011 FNB House Price Index showed further slowing in year-on-year (y/y) growth, after previous months' data releases had hinted at some possible stabilisation.

For January, the year-on-year growth rate in the index was 1.4%, which was significantly lower than the revised 3.1% for December.

In real terms - adjusting for a December consumer price (CPI) inflation rate of 3.5% y/y - this means that December saw -0.4% real decline.

The slowing year-on-year growth rate in the average house price remains largely driven by weak demand growth, which in turn is the result of, firstly, a weak economy and its constraining effect on household income growth, and secondly the high levels of household debt relative to disposable income. But strong residential supply, an overhang from the building boom of a few years ago as well as high levels of financial pressure-related selling, also plays a key role, FNB said Tuesday.

The aggregate residential supply rating was a higher +0.152, from a previous month's +0.142, while the aggregate demand rating weakened from a negative value of -0.067 previous to -0.083 in December. Subtracting the aggregate supply rating from the demand rating to obtain the Market Strength Index, the collective opinion of the valuers is that demand relative to supply has weakened further from a rating of -0.209 in December 2010 to -0.235 in January, the continuation of a weakening trend in the Market Strength Index spanning back to July 2010.

FNB noted that January's economic data releases point towards a distinct lack of stimulus for the residential property market. At its Monetary Policy Committee meeting in January, and after a brief flurry of interest rate cutting at the previous two meetings late in 2010, the Reserve Bank reverted to keeping interest rates unchanged, thereby not providing any further stimulus to the housing market.

During the MPC statement following the meeting, the governor warned of inflationary pressures. These inflationary pressures are not yet reflected in domestic consumer price inflation numbers, but recent upward pressure on global food prices, oil price growth and recent local petrol price increases, China reportedly "overheating" and the USA printing money on a large scale, should all serve as cautions with regard to future inflation.

"Not surprisingly, therefore, many commentators are speculating as to the timing of the start of interest rate hiking, while few see further interest rate cutting it would appear," it said.

For the time being, however, local inflation is far from troublesome. However, the inflation rate appears to have flattened out in recent months, arguably the key reason for no further SARB rate cutting.

"Our own Firstrand view is that rate cuts have indeed ended, and that early-2012 could herald the start of the hiking cycle."

Given that it is interest rate cutting, and not sideways movement, that provides the growth impetus to residential and mortgage demand, 2011 is expected to be a year of a distinct lack of interest rate stimulus, following the rate cutting of 2009 and 2010.

With regard to economic growth, the near term promises to be mediocre, if the SARB Leading Business Cycle Indicator is anything to go by. While not all sectors are well-correlated to the Leading Indicator, residential mortgage demand - a good indicator of the credit-driven part of the residential market - most certainly is, as one can see on the graph below left depicting the year-on-year rate of change in the Leading Indicator versus change in the value of new residential mortgage loans granted. Both year-on-year growth rates had been slowing steadily in the 2nd half of 2010 along with slowing house price growth.

Examining month-on-month growth in the Leading Indicator late in 2010, a better indicator of momentum that the year-on-year calculation, one sees percentage change in recent months hovering at close to zero.

The two successive further interest rate cuts late in 2010 appear to have done little to halt the declining trend in house price growth to date. This arguably continues to be reflective of the very significant financial pressure, accompanied by high levels of debt relative to disposable income, that the household sector still experiences.

"The combined result of a lack of further expected interest rate cutting in 2011, and what looks like being weak medium term economic growth, keeps us retaining the view of a very flat residential property market, with average price growth for 2011 as a whole to be close to zero," FNB concluded.
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