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SA house prices continues decline into OctoberJOHANNESBURG (November 04) - The FNB House Price Index for October released today shows a continuation in the decline of year-on-year inflation trend, from a revised 2,2% in September to 1,1% in October.
In real terms, that puts the September deflation rate (deflated using the CPI) at –9,6% year-on-year.
Given rising wage inflation, declining house price inflation and sideways movement
in interest rates, FNB notes in its comments on that data, that it believes this will translates into improving housing affordability on both counts, i.e. the average price/average income ratio as well as the debt service cost on a 100% loan on the average priced house/average income ratio.
“Breaking the index down into segments, we see that the smaller sized “two bedroom and less sub-segment ”in the freehold market is experiencing major strain, having recorded –11,7% year-on-year deflation in the third quarter.
“The three-bedroom segment of the freehold market, by comparison, appears far more stable, having inflated by +9,4% in the third quarter year-on-year.”
On the sectional title side of the market, FNB says there was far less of a gap between the “two bed and less segment” (+6,6%) versus the three bedroom segment (+6,3%), although the two bed and less sectional title segment has slowed down more significantly in recent years off a very high base.
The severe weakness in the freehold two bed and less segment is believed by FNB to be due to the more severe financial strain believed to be being experienced by lower income groups, many of whom are believed to reside in this sub-segment. Lower income groups currently experience higher price inflation rates, and possibly weaker job prospects in these slower economic times than their more highly-skilled counterparts.
“It is believed that the more rapid weakening in the lower end of the market in recent times is causing the house price index to show a slightly better picture than the reality “on the ground”. This is because when sub-segments deteriorate more rapidly than others, their weighting in an average index declines, and so too their influence.
“Therefore, although the weakening in the index is believed to be “true to life”, in reality we are probably already into price deflation. Such are the practical challenges in compiling such statistics.
FNB say the near term outlook still remains filled with risks. “These risks have shifted, though, away from inflation and interest rate risks towards growth risks. With commodity prices (notably oil) showing sharp declines, and CPIX inflation starting to turn down in September, the prospects are improving for interest rate cutting, which we anticipate to start in April.”
“But,” it adds, “it is the economic growth prospects that are a concern at present. Firstrand’s view is that South Africa can keep out of recession during the current slowdown, growing slower but positively at least. However, while the recently announced bailout for US financial institutions is encouraging, it is tough to gauge whether this is the end or whether there is lots more bad economic growth news to come regarding the global financial crisis. This uncertainty will probably encourage local lending institutions to go cautiously, and further deterioration in the year-on-year percentage change in the house price index is expected until around mid-2009, including a period of deflation.” << Back to news section
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