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Market Overview by John Loos, Part 1of 4The October FNB House Price Index showed a further decline in its year-on-year inflation rate, as it edges ever closer towards negative growth or deflation. From a revised growth rate of 2,2% in September, the year-on-year inflation rate declined to 1,1% in October.
On a month-on-month basis, a seasonal factor may have assisted in pushing up the growth rate into slightly positive territory in recent months, an event, which happens regularly after a mid-year dip, but this should not be construed as meaning any sort of recovery in the market yet. The average price of house was R743 517.
In real terms, the recently low house price inflation rate, and contrasting high consumer price inflation rate, translates into a year-on-year real house price deflation rate of -9.6% in September.
The conversion to real prices makes use of the headline consumer price index. The anticipated turn in consumer price inflation may start to see the real house price deflation rate stabilise soon.
The recent house price trends probably imply that for those who are employed on largely fixed remuneration, the affordability index for the average-priced house is by now showing improvement. Labour data runs a few quarters behind, so one has to project average wage inflation for quarter 2 and 3. Assuming nominal average wage inflation of 8% for these two quarters, and given the recent flat interest rate trend and FNB average House Price average, both measures of affordability are believed to be starting to decline.
The first measure of affordability is the average house price/average remuneration index. For some quarters we have seen the average house price/average remuneration
index moving broadly sideways, and assuming 8% wage inflation for quarter 2 and 3 (not unrealistic given the catch up that wage have to play with high consumer price inflation) it is likely that this ratio is now on a declining trend.
The other (more important for the credit buyer) ratio, namely the cost of the instalment on a 100% loan on the average priced house/average remuneration index, has been rising more steadily until very recently due to rising interest rates. However, given our view that the third quarter sideways movement in interest rates represents the peak, it is plausible to expect that the slight decline in the third quarter estimate of this index is the start of a declining trend.
Breaking the FNB House Price Index up according the number of bedrooms that houses possess, it would appear that the biggest part of the slowdown in recent times has been in the smaller-sized “2 bedrooms and less” market segment. More specifically, it is the freehold sub-segment of the “2 bedroom and less” segment that appears to be in troubled times at present. However, one can see on the sectional title side too that, although the “2 bedroom and less segment” is not in price deflation yet (and still has inflation slightly higher than the sectional title 3 bedroom market), it has slowed more significantly from a substantially higher price inflation rate than the 3 bedroom sectional title segment since around 2006.
Broadly-speaking, therefore, it would seem that the 3 bedroom market is a more stable one than the smaller room number segments.
The price deflation rate for the freehold 2 bedroom and less segment was -11.7% in the third quarter, while the freehold 3 bedroom market inflated at +9.4% year-on-year for the same period of 2008.
On the sectional title side, the inflation rates were 6.6% and 6.3% for the “2 bedroom and less” and “3 bedroom” segments respectively.
What drives these significant differences in trends between the segments?
Importantly, the freehold 2 bedroom and less market has the lowest average price (R352 902 in the third quarter), and is thus on average the segment where the many lower income households reside.
The sectional title 2 bedroom and less segment (R588 016 average price) by contrast is a market where one could find a higher portion of “upwardly mobile” new entrants to the housing market. Such people buy smaller-sized houses not always because of income constraints but due to not requiring a larger-sized unit given their often single of “double income no kids” status, or alternatively being in the process of just starting a family.
End of Part One << Back to news section
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