Zero percent real house price inflation at the current time should not be too surprising as valuers point to a supply-constrained market with a good balance between supply and demand, according to John Loos, FNB’s household and property sector strategist.
Loos said on Tuesday that the FNB House Price Index for April 2016 rose by 6.4% year-on-year. “This is slightly faster than the revised 6.3% rate recorded for March, ‘stalling’ a prior gradual slowing trend since the 6.9% ‘high’ reached in October 2015,” he said.
“The mild acceleration in April is not significant, but does ‘stall’ the trend of slowing to lower single-digit price growth which we would expect on the back of rising interest rates.”
In real terms, when adjusting for Consumer Price Index (CPI) inflation, the rate of house price growth “hugs” the zero level, Loos said, having recorded zero in March. This was due to a 6.3% average house price inflation and 6.3% CPI inflation.
“Zero percent real house price inflation would suggest a market still very well balanced between supply and demand,” said Loos.
“However, (FNB valuers) continue to point to deteriorating residential demand, which would ultimately lead to a less well balanced market should it continue.”
The average price of homes transacted in April was R1 061 075, said Loos.
Speculative activity limited
“The scope for speculative activity or ‘over-exuberant’ home buying is limited in the current environment, with prime rate at 10.5% remaining well above average house price inflation,” he said. “In most cases, therefore, it would make little sense to borrow money in order to speculate for short term capital gain.”
In order to create a “speculator’s paradise” in residential property, it is important to have price growth at a percentage significantly faster than the percentage of the annual interest charged on a mortgage loan, Loos explained.
“Such an environment would give rise to widespread use of cheap credit to buy and sell properties in a relatively short space of time and make big capital gains – 2004/05 was such a speculators’ paradise.
“For a healthy market with low levels of speculation, we believe that this real rate should remain positive. Indeed, that was again the case in April, where the Real Alternative Prime Rate was 4.08%, having risen in recent times on the back of further interest rate hiking along with slowing house price inflation.
“We thus believe the SA Reserve Bank’s monetary policy stance to be appropriate currently from a residential market health point of view.”
Looking ahead, Loos said it is likely that residential demand will slow down in the near term, with wage inflation unlikely to have kept up.
“Slower average house price inflation later in the year thus still remains a likelihood, we believe, despite the recent ‘stickiness’ at near to 6%.”