5 May 2011
The April 2011 FNB House Price Index showed further mild acceleration in year-on-year growth on March's revised rate of 1.2%, to 2.2%. This is the 2nd successive month of mild acceleration in year-on-year house price growth, an event which we believe is the lagged result of a further brief flurry of interest rate cutting by the Reserve Bank (SARB) late in 2010. Those rate cuts caused a mild uptick in residential demand which may have been more than just the usual summer seasonal factors.
In real terms, however, adjusted for consumer price inflation, the year-on-year decline continues, to the tune of -2.8% in March (April CPI figures not yet available), given that nominal house price growth was well-below the higher 4.1% CPI inflation rate. However, the FNB Valuers Market Strength Index suggests that our valuers have started to see further deterioration in the strength of demand versus supply during April, after a some small signs of stabilization in preceding months of 2011. This weakening in the market balance is the combined result of a further strengthening in the supply of residential stock on the market during the month, along with a weakening in demand, according to the valuers' combined opinion. The contrast between the valuers' combined opinion and a slight acceleration in year-on-year price growth suggests that, we should not expect too much from the slight rise in price growth. What is probably being reflected in the recent house price trend is the mild residential demand improvement late in 2010, which was the result of 2 late-2010 interest rate cuts. However, the last rate cut was 5-and-a-half months ago in November, and it is likely that the impact is starting to wear thin. So, while price growth usually lags demand trend changes, and we are only now seeing the impact of rate cuts in house price trends, the weakening Market Strength Index suggests that the acceleration in house price growth will probably be short lived for the time being. Currently, the talk is about rising oil and food prices, rising consumer price inflation, from 3.7% in February to 4.1% in March, and the widespread expectation of interest rate hikes later in 2011. Such an event, we believe sustains the possibility of renewed house price decline, given the current weak demand relative to supply.