Data from FNB’s House Price Index for the month of October shows a tepid rise in year-on-year growth – at 4.3% – noticeably lower than both consumer price and rental inflation.
According to StatsSA CPI (Consumer Price Index) figures, residential rental inflation has been outstripping average house price inflation of late. This has been instrumental in another aspect of the housing market’s slow correction, i.e. lowering the average house price-rent ratio, the lender said.
Property strategist at FNB, John Loos said that the price-rent ratio is important in determining how costly the home buying option is relative to a key competing option, namely rental.
“It is merely another form of real house price calculation, comparing house prices against the competing rental option in much the same way as we compare house prices to competing consumer goods and services price levels when compiling what we usually call real house prices,” he said.
He said that analysts often become concerned when the price-rent ratio is very high, as it can begin to make the rental option relatively more appealing, contributing at some stage to a drop in home buying and a fall in house prices. House price booms, or strong market periods at least, typically take this ratio higher.
In recent months, the FNB House Price-Rent Ratio Index has resumed its broad gradual declining trend that started early in 2016, Loos said. From a 9-year high in November 2015, the House Price-Rent Index has declined by -4.6% in September 2017.
This decline is the combination of average rental inflation, according to CPI Rental stats, accelerating to 5.68% year-on-year in the September CPI numbers, whereas average house price inflation for September was a slower 4.2% year-on-year, Loos said.
This brings the cumulative longer term decline in the Price-Rent Ratio Index to -15.92% since January 2008, a time when the pre-2008 house price boom had left the Price-Rent Ratio at extreme highs by historic standards.
FNB noted that the other important ratio, namely the instalment on a 100% bond on the average-priced house/Rent Ratio Index, remains somewhat lower. It has been kept well below January 2008 levels by relatively low interest rates which, even despite a rise of 200 basis points since early 2014, remain significantly below mid-2008 peak levels, the bank said.
“This index is a very significant -28.4% below January 2008 level, and in part explains why a still-high price-rent ratio has not led to a very strong surge in demand for the rental option in recent years,” Loos said.
Examining the real house price trends (house prices adjusted for overall CPI inflation), FNB noted that the level as at September 2017 had lost -4.9% since a near 9-year high reached in December 2015.
Looking a bit further back to the all-time real house price peak at the end of 2007 (at the end of the pre-2008 housing boom period), on a cumulative basis real house prices were -19.6% down on that high as at September 2017.
However, looking back further, despite a mediocre performance in recent years, the average real house price currently remains as much as 63.9% above the end-2000 level, almost 17 years ago, and a time back just before boom-time price inflation started to accelerate rapidly.
“In short, we believe both of our versions of real house prices, i.e. the FNB House Price-Rent Ratio Index (Average house price-CPI-rentals ratio) and the FNB Real House Price Index (average house price-overall CPI ratio) to still be at relatively high levels, but in both indices the downward corrections continued in September 2017, and the cumulative corrections in both since end-2007, beginning-2008 have been significant at between -15% and -20%,” Loos said.
FNB said that while the year-on-year house price growth rate has still recently shown mild acceleration, a better way to be up to date on most recent house price growth momentum is to view it on a month-on-month seasonally-adjusted basis.
“And a steadily slowing month-on-month growth rate suggests that year-on-year house price growth should also start to slow soon, likely sustaining the recent period of real house price decline.”
“Calculating house price growth on a month-on-month basis we have seen a slowing price growth trend, which started in April 2017,” said Loos.
The month-on-month house price growth rate was a lowly 0.06% for October, down from the prior month’s 0.12% and now well-down on the 2017 high of 0.83% reached in March, he said.
“Not only does the recent slowing month-on-month house price growth rate point to possible renewed weakening in the economy, but also to the likelihood that year-on-year house price growth may soon begin to slow once more. This would likely keep house price growth below rental and overall CPI inflation, sustaining the gradual real house price and price-rent ratio corrections in the near term,” Loos said.