The May 2011 FNB House Price Index once again shows an index just managing to defy gravity to remain in low positive growth territory, and has in recent months shown a very slight acceleration in year-on-year growth. From a 2011 low point of 1.2 percent year-on-year in February the price growth rate rose to 2.1 percent in May (-2.1 percent if inflation of 4.2 percent is taken into account), up from a revised 1.7 percent rate in April.
We ascribe this very slight acceleration in price growth to the lagged positive impact of the two further 50 basis point interest rate cuts late in 2010, along with the effects of the second round of US Quantitative Easing (QE2) late in 2010, which supported the global economy mildly and led to a slight uptick in residential demand in the summer months.
The recent period of improved house price growth, however, looks far less impressive than the market response to the more significant interest rate cutting of five percentage points between December 2008 and August 2009, which was accompanied by massive developed country stimulus packages, including the US’ "QE1". That stimulus had led to an earlier "mini-cycle" price growth peak of 10.8 percent year-on-year in May 2010.
As yet, though, this second "mini-recovery" of early-2011 has been too mild as to translate into any house price growth in real terms. If one adjusts the average house price index with the consumer price index, the April real house price growth rate remained negative to the tune of -2.4 percent, with consumer price inflation having risen to 4.2 percent year-on-year in that month.
As mentioned above, the stabilizing, and slight acceleration, in house price growth can arguably be explained by global and local economic factors, and indeed yesterday's release of the first quarter GDP (Gross Domestic Product) estimate for South Africa showed a further slight acceleration in seasonally adjusted quarter-on-quarter annualised growth, from a previous quarter’s 4.5 percent to 4.8 percent. The solid performance in economic growth in the two summer quarters, after some weakness during the winter, can also arguably be ascribed to the further global stimulus along with the late-2010 domestic interest rate cuts.
Unfortunately, however, the FNB Valuers panel continues to report very weak demand relative to supply of residential property, suggesting that we should continue to keep our expectations regarding the property market modest in the near term. In addition, both the domestic SARB Leading Business Cycle Indicator, as well as the US and G7 Leading Indicators, point towards a likely near term slowing in global and local economic growth. Such leading business cycle indicators tend to correlate well with local residential property demand, suggesting a slowdown to come in the housing market too.
Such indications of possible near term slowing in economic growth as well as in housing demand should not be surprising. Oil prices remain sticky around $115/barrel (Brent crude), which is sure to impact negatively on global and local economic growth while locally we have seen some increase in inflation pressures, with consumer price inflation having risen to 4.2 percent in April.
At this stage, despite some rise in inflation, it is far from a foregone conclusion that interest rate hiking will take place this year. While our group’s expectation is indeed for a 250-300 basis point interest rate hiking cycle commencing in the second half of 2011, the possibility does exist that the global economy slows quickly enough for global inflationary pressures to be dampened before the SARB gets to interest rate hiking. However, whether it is rising interest rates or a significantly slower economy, the negative impact on our residential property market should be much the same.
In short, therefore, our indicators suggest that residential demand went through a very mild "mini-recovery" in the summer months and that, with a lag, this appears to have translated into a slight acceleration in year-on-year nominal (though not real) house price increase, as estimated in the FNB House Price Index.
Looking forward, however, we remain of the opinion that, if the residential market cannot achieve respectable house price growth after such a huge interest rate stimulus, a period of house price decline would be the likely outcome of a possible phase of interest rate hiking or of slowing economic growth, or both.