The economy had a good period up until mid-2012, but since then has not been setting the world alight. But investment in new residential stock since 2008 has also been slow, thus constraining supply growth and allowing demand growth to catch up somewhat. Therefore, varying degrees of stock constraints in home buying and rental markets have become a key theme.
Stock constraints appear most acute in Namibia, the Common (Rand) Monetary Area's second largest economy. Our FNB Namibia Average House Price continues to show very strong growth to the tune of 21.4% year-on-year for the second quarter of 2013. That country has had a faster economic growth rate in recent years than SA, but it is also said that supply constraints around the capital Windhoek are particularly acute due to limited land availability. Over the long term, the apparent result of such land constraints has been that our FNB Namibia House Price Index has risen cumulatively by 515% from the third quarter of 2000 to the second quarter of 2013, while the South African FNB House Price Index rose over the same period by a lesser 239%.
Back in South Africa, the supply constraints don't yet appear nearly as severe, but they have been mounting, and slow supply growth is not only an issue in the home buying market. There are clear signals from the residential rental industry that the rental market fundamentals are strengthening. While the CPI inflation rate for rentals increased only marginally in June, low levels of buy-to-let buying since 2008 have gradually led to mounting supply constraints in the rental market. The major portion of letting agents are now reporting shortages of rental stock. Get set for stronger rental inflation, which could see yields resume their rising trend of recent years, but the downside risk is possible upward pressure on CPI inflation and possibly interest rates.
On the home buying side, our second quarter Estate Agent Survey showed 13% of respondents citing stock constraints, not yet severe but higher than a year or two ago. And so FNB House Price Index growth continued to accelerate mildly in July; from a revised year-on-year growth rate of 6.7% in June, the July growth rates reached 6.9%. In real terms (adjusting house prices for general inflation in the economy using the CPI), as at June we were still seeing mildly positive year-on-year house price inflation to the tune of +1.12%.
The market does remain cheap for foreigners, however. In dollar terms, the July FNB House Price Index declined year-on-year by -11%, in Euro terms by -16.4%, and by -10.2% in UK Pound terms, all of this due to recent deterioration in sentiment towards SA and resultant Rand weakness. This weakness has possibly been responsible for some increase in foreigner "bargain hunting" over the past 2 years, but foreign buying performance doesn't appear to be back up to pre-2008 recession levels.
Back to the market in Rand terms and the FNB Valuers' Market Strength Index for confirmation of recent trends, and FNB's valuers have also indicated that recent relative market strength has been the result of the combination of positive residential demand growth as well as a more constrained supply of residential stock on the market.
Certain high-frequency indicators also confirm the recent period of relative residential market strength. After slowing somewhat in the summer months, year-on-year growth in Transfer Duty Revenues came back strongly in the second quarter of 2013, and as at June were growing by 27.5% year-on-year in value.
The Reserve Bank (SARB) left interest rates unchanged in July, with prime rate at 8.5%. So, despite some recent mild acceleration, house price growth (Namibia excluded) remains lower than prime rate, not making it wildly attractive for speculators wanting to use cheap credit to profit rapidly from strong house price growth - a healthy situation. This may also be curbing the less seasoned buy-to-let investors, many of whom typically (perhaps erroneously) also base their investment decisions on recent price growth trends as opposed to yield.
With regards to the South African house price outlook, the FNBBER Consumer Confidence Index did point to some mild improvement, returning to very low positive territory (+1) after 4 consecutive quarters of decline. But such a return to positive territory points to little more than confidence stabilising at a very weak level after a major deterioration. SA's economic growth rate remains pedestrian, with the SARB again having lowered its 2013 GDP growth projection down to 2% (and FNB's at 1.9%). Therefore, despite a recently more positive South African housing market period, it is expected that the slower period of economic growth since late 2012 will weigh on the home buying market, restricting the level of supply constraints, and that price growth will moderate mildly in 2013, averaging nearer to 5% next year after an expected 6.6% growth rate in 2013.
The full FNB Residential Property Monthly report can be accessed here.
For more information, go to www.fnb.co.za.
