Cape Town - The average house price growth is anticipated to slow from a 6% average in 2015 to a 4.8% average in 2016, and a still slower 3.8% in 2017, John Loos, household and property sector strategist at FNB Home Loans, said on Tuesday.
This is due to the negative impact of weak economic conditions on household income growth.
"While still positive in nominal terms, these projected rates would be below Consumer Price Index (CPI) inflation, translating into negative growth in real terms," said Loos. Real terms would mean house prices adjusted for CPI inflation.
"Such negative real house price growth would reflect both higher interest rates along with ongoing weakness in economic growth, employment and household income growth."
A consequence could then be that the rental market begins to mildly outpace the slowing home buying market through the forecast, in turn leading to rising yields on residential property.
The FNB House Price Index for February 2016 rose by 6.5% year-on-year - virtually unchanged from the previous two months’ revised rates, and mildly down from the 6.9% 2015 high point reached in October.
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"With the month-on-month average price growth rate having slowed significantly, however, we anticipate a resumption of the slowing rate of year-on-year growth in the near term," said Loos.
He added that the recent months’ "treading water" in the year-on-year price growth rate has much to do with a low base effect created through a lull in monthly house price inflation early last year.
In real terms, when adjusting for CPI inflation, the rate of house price growth slowed to 0.2% in January, from a revised 1.3% in December, the slowing being caused by a rise in CPI inflation, from 5.2% in December to 6.2% in January. February's CPI data is not yet available.
"Examining the longer term real house price trends, the average real price currently remains 69.6% above the January 2001 level, around 15 years ago, and a time back just before boom-time price inflation started to accelerate rapidly. We, therefore, still regard current real price levels as very high," said Loos.
Focusing on the month-on-month average house price inflation rate, Loos continued to see some loss of growth momentum in February, the rate having slowed to 0.23% on a seasonally-adjusted basis, from 0.25% previous and now significantly slower than the 0.92% 2015 high of September. This should soon translate into slower year-on-year price increases, in his view.
READ: Slowdown in average house price growth expected
The FNB Valuers Market Strength Index (MSI) appears to provide support in recent months for the expectation of a near term slowing in house price inflation, according to Loos.
"The start of market weakening has to do with the combination of gradually rising interest rates along with weak and deteriorating economic fundamentals," explained Loos.
"After a Real GDP (gross domestic product) growth rate believed to have been not far from 1.5% in 2015, the FNB forecast is for slower growth of 0.5% in 2016."
The further expected slowing in growth is on the back of ongoing global economic and commodity price weakness, with increasing speculation around a possible global recession, and gradually rising interest rates.
"The current environment of high social tensions and fragile labour relations continues, and this poses significant downside risk to economic and residential market performance forecasts," said Loos.
CPI inflation is projected to rise from 4.6% average in 2015 to 6.1% average for 2016, on the back of a now weaker rand, and higher food price inflation as the drought impact is felt, in his view.
"The SA Reserve Bank (Sarb) is expected to continue to lift interest rates slowly, with the prime rate peaking at 11.25% in the first half of 2017. Much, though, will depend on the rand’s fortunes and its potential inflationary impact," he said.
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