Property Barometer - April 2016

In April 2016, the FNB House Price Index recorded a 6.4% year-on-year rate of increase, which is slightly faster than the 6.3% revised rate of the prior month.

Given CPI (Consumer Price Index) inflation of above 6%, in real terms average house price inflation hovers near zero.

Zero percent real house price inflation at the current time should not be too surprising, given that FNB’s Valuers still point to a supply constrained market with a good balance between supply and demand. However, they continue to point to deteriorating residential demand, which would ultimately lead to a less well balanced market should it continue.

KEY POINTS

The FNB House Price Index showed a year-on-year increase of 6.4% in April 2016, slightly higher than the revised 6.3% of the previous month. The most recent months’ house price growth rates remain mildly down off the 6.9% 2015 high point of October, but “stickily clinging” to levels just above 6%, which represents near zero inflation in real terms (when adjusted for CPI).

Despite a stalling in the slowing house price inflation trend in April, FNB’s Valuers, as a group still perceive a market weakening, with the FNB Valuers’ Market Strength Index (MSI) having declined further in April. However, the MSI is still above the 50 level, implying that they still rate demand stronger than supply for the time being. Therefore, to see recent house price inflation at near to the zero real mark should not be too surprising.

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. In most cases, therefore, it would make little sense to borrow money in order to speculate for short term capital gain.

While the Price-Rent Ratio, as well as the Bond Instalment-Rent Ratio declined slightly in March, we believe this to be more “noise” than indicative of a trend change. In recent years, both these ratios have been rising, and with the CPI for rentals showing a year-on year inflation rate of 5.18%, still noticeably lower than the 6.4% average house price inflation rate, it appears likely that we have a few more months of increase in these ratios before perhaps reaching a turning point. 

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