John Loos's Blog

House Price Index - February 2010

JohnL — Mon, 08 Mar 2010 10:39:00 GMT

The existing home market is a happier place these days, arguably past its worst state of health, as demand grows off the dismal lows of early-2009 and the acceleration in house price inflation continues.

The FNB House Price Index showed a further increase in year-on-year inflation, from a revised 3.6% in January to 5.8% in February. This remains largely the result of the big 2009 interest rate cuts, and some moderate bank easing of lending criteria, although a gradually improving economic growth rate must be starting to make a positive contribution too. On a cumulative basis, this implies an 11.1% rise in the index since June 2009 (June 2009 being the low point in the recent recession-driven price slump).

But, despite encouraging signs, the question is how healthy is the market really? A good way to describe the current state of the market could be to compare it to an Everest expedition. The expedition has recently summited, conquering the toughest and most dangerous part of the mountain, and is now on its way down to safer places. But the climbing party still remains in the notorious "Death Zone", the part of the mountain above 7000m, and the climbers are still weak from a lack of oxygen. This means that, while recent developments have been positive for the market, the expedition is still at a risky location on the mountain where any unexpected incidents can derail its descent out of "thin air".

Nevertheless, for the observers watching the progress of the expedition from base camp through their telescopes, there are an increasing number of signs that the party is about to cross the 7000m altitude barrier, and exit the Death Zone, on its way down the mountain and back to the safety of base camp.

The "leading indicator" of improving market health has been the return to positive nominal house price growth. But this alone is an insufficient indicator of good health in the market. We want to be sure that residential demand is moving back into line with supply. Possibly a better indicator of this is the estimated average time of properties on the market, as provided by FNB's Property Barometer survey. Here, our view is that the market will probably have exited the Death Zone at the stage when the average time of a property on the market prior to being sold declines to below 3 months, while less than 2 months would signal the ultimate return to safety and good health.. The 4th quarter 2009 Barometer survey put this average time on the market at 13 weeks and 2 days, almost at the 3 month mark and steadily declining.

Further confirmation that the market is exiting the Death Zone, and getting back to a point where demand is sufficiently robust to exceed supply, would be a return to "real house price" inflation. Adjusting the January house price average with the most recent consumer price inflation number, the FNB House Price Index showed -2.4% year-on-year deflation, less than the previous month's -4%, and now perhaps a month or two away from a resumption of positive real price inflation - a further source of encouragement.

And so, as time passes, an increasing number of economic and property indicators are approaching their "critical" levels as the market strengthens. Many questions still remain regarding the sustainability of the global economic recovery, and thus our own economic and property recovery, while last week's Eskom tariff hike announcements were bad news for the market. However, for the time being the positive impact of last year's interest rate cuts continues to feed through into the residential market, while positive economic growth should be having something of a positive impact on household sector disposable income. As such, we remain of the view that our moderate, but improved, average price inflation forecast of 8% for 2010 as a whole can be achieved. For now, therefore, it would appear that the market is on the verge of exiting the notorious DEATH ZONE.

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FNB House Price Index - January

JohnL — Thu, 04 Feb 2010 13:15:00 GMT

Please see attached for the January FNB House Price Index. This month, we took a special look at the volumes and price trends for “coastal holiday towns, compared to high income metro areas of comparable average price. Not surprisingly, with a stressed household sector still predominantly focused more on essential primary residential buying, we observe coastal holiday towns’ markets lagging considerably in the recovery. The FNB House Price Index showed a further acceleration in year-on-year inflation, from a revised 2.3% in December to 3.1% in January 2010. This is the 3^rd consecutive month of year-on-year price inflation.

January was the third successive month of year-on-year increase in house prices after almost a year of decline. This reflects a modest start to 2010, but more importantly an improving trend. Little changes to our expectation that price inflation won’t go further than single-digits, with a household sector still under significant financial pressure, and the belief that interest rates are at or near to the bottom. The SARB Governor did hint at the possibility of interest rate reduction in the not too distant future, but given the “downward stickiness” of consumer price inflation, even were further reduction to happen it would be unlikely to be substantial. The consumer price inflation rate actually rose from 5.8% year-on-year to 6.3% in December, and even though it is expected to return to the 3%-6% target range, both the SARB and ourselves expect it to hug the upper end of the target band, limiting the scope for further interest rate cutting. Nevertheless, the strengthening in the market is expected to continue until around mid-2010 at least, with the full impact of last year’s interest rate cuts still to feed through, and supported by a moderately strengthening economy. It is, however, a mild recovery where primary residential buying is the dominant focus, a view that is supported by the above indices which report a stronger high income metro market compared with coastal holiday markets. In addition, the FNB Residential Property Barometer for the 4^th quarter, released last week, continued to show little sign of buy-to-let buying increasing in importance relative to the overall market.

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Mortgage Advances & Household Credit Growth (December)

JohnL — Sat, 30 Jan 2010 13:24:00 GMT

Please see attached for the December household credit and mortgage numbers.

Mortgage advances growth continued its long declining trend, but overall household sector credit growth rose slightly.

Although we saw a slight increase in total household sector credit growth in December, it is too early to say that this is the start of a rising trend, and the growth rate remains very weak. At such a weak rate, and given that the economy has begun to stabilise, we expect household sector nominal disposable income growth to outpace credit growth, and for the decline in the debt-to-disposable income ratio to continue in 2010, slowly leading to a more comfortable household indebtedness situation..

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FNB Residential Property Barometer [4th Quarter 2009]

JohnL — Wed, 27 Jan 2010 13:28:00 GMT

Please see attached for the latest results of the FNB Property Barometer for the 4^th quarter of 2009.

The FNB Residential Property Barometer survey of estate agents continues to point towards residential market improvement. Demand is up further, albeit only marginally from quarter-to-quarter, but still very significantly on a year-on-year growth basis, and average time on the market is significantly down. Financial stress-related selling is also down, although it is safe to say that it is still painfully high.

However, despite growth continuing, the year-on-year rate of growth in the demand activity rating did decline from the previous quarter’s growth, which may be an early sign that a plateau in demand will be reached later in 2010 as the interest rate cutting stimulus wears off.

The Barometer survey pointed to a slight decline in the percentage of so-called Black buyers buying suburban property, compared with 2008, but this was not significant, and the longer term trend still shows a steady rise in the Black population group’s importance in the “suburbs”.

Finally, the survey indicates that, these days, far less agents believe that income levels are far behind home price levels than was previously the case, i.e. they believe that the traditional affordability measure has improved. Our own traditional affordability measures also point towards this. However, we do not believe that the affordability issue has diminished in importance, but merely that it has changed in nature. While the average price/average income ratio has improved, and the cost of servicing debt has also declined somewhat due to rate cuts, the “new affordability issue” now relates to the costs involved in owning and running a home. The most glaring example currently is Eskom tariff hikes, but don’t discount the probability of water, sewage and municipal rates showing steady increases in coming years, as local government’s strive to fund shortfalls and other non-electricity infrastructure investment is also required. These rising costs are in favour of smaller-sized homes and stands with less luxuries built in, while the mounting urban transport and space pressures heighten the importance of location. Indeed, affordability looks set to be a key housing-related “theme” in the new decade, but in a different form.

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SARB Leading Business Cycle Indicator [November 2009]

JohnL — Sat, 23 Jan 2010 13:31:00 GMT

The latest Leading Indicator (A good indicator of near term moves in both the economy as well as the residential mortgage market) datapoint to appear, that of November 2009, indicated a significant further acceleration, on a month-on-month basis the value going from 116.5 to 119.8, which translates into a year-on-year growth acceleration from 6% in October to 11.6% in November. This bodes well for further improvement in growth in new residential mortgage loans and re-advances granted in the current quarter. While prospects for further interest rate cuts don’t appear wonderful, it is likely that some of last year’s rate cutting stimulus still has to be felt early in 2010, while the rise in the leading indicator is also driven by moderately strengthening economic growth signals. An improving economy has positive implications for disposable income growth and thus residential purchasing power in the near term.

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StatsSA Building Stats (November 2009)

JohnL — Fri, 22 Jan 2010 13:35:00 GMT

The November StatsSA building stats continue to point towards an extremely weak picture for the residential building sector. For the 3 months to November 2009, the square metreage of residential buildings completed declined by -35% year-on-year, almost unchanged from the -35.4% year-on-year decline for the 3 months to October.

There is, at best, some early indication that the sector may be moving towards stabilisation, with a diminishing rate of decline in square metreage of building plans passed now apparent. For the 3 months to November, square metres of building plans passed declined year-on-year by a still-massive -27.4%. However, this is an improvement from the -32.3% for the 3 months to October, and more so compared to the -48.7% for the 3 months to September.

A diminishing rate of decline in building plans passed may possibly be an early sign of pending improvement in the residential building environment. However, the figures remains very weak. The existing home market has indeed seen an improvement in demand through 2009, but there remain many stressed sellers in the market, and as such many bargain prices. This, coupled to building cost issues that don’t appear to altogether have gone away, suggest that the road to building sector recovery is a long one. As such, we remain of the belief that it may only be in the second half of 2010 that we begin to see positive year-on-year growth in completions, off which will be a very low base.

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FNB House Price Index (December)

JohnL — Mon, 11 Jan 2010 10:07:00 GMT

Bad news first.

The FNB House price Index showed the average house price for 2009 declining by -3.9% for the year as a whole, when compared to the average price for 2008.

The good news?

Late in the year the index was firmly on an improving trend, with December 2009 showing further rise in year-on-year house price inflation to record +2.7%. While still nothing to be over-excited about yet, the trend points towards a significantly better 2010 for those of us involved in the residential property market, and 8% average house price inflation is projected for the year as a whole. The FNB Namibian House Price Index shows the same improving trend as the South African one, but suggests that that country’s residential market may be further down the path of recovery, having recorded double-digit increase by the 4^th quarter of 2009.

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House Price Trends and Property Affordability

JohnL — Mon, 16 Nov 2009 09:23:00 GMT

According to our sample of deeds data we are observing the following (read through the attached document for more insight)

- High priced area end is maintaining its status as the leader in the cycle, with its volumes recovering earlier
- The affordable segment is still languishing at far worse rates of year-on-year decline as to August

We also examined the the current and future levels of residential affordability which appears to be back on the long term trend line. Is this the appropriate level of affordability? Has the “correction” in the market completed itself? We think probably not, and believe that in the near term there will be further improvement in the 2 measures of affordability. However, long term we think that mounting urban land scarcity will imply significantly higher real property values implying significantly worse levels of affordability, good for the property investor perhaps but also implying a dramatic change in middle class urban lifestyle. Read the attached report for more information.

October FNB House Price Index

JohnL — Mon, 02 Nov 2009 10:17:00 GMT

Enjoy October's FNB House Price Index (pdf attached), which shows a recorded -1% year-on-year deflation and that the trend is firmly back towards year-on-year inflation (possibly by next month).

John's insights - SARB new mortgage loan numbers

JohnL — Mon, 07 Sep 2009 06:33:00 GMT

Although the South African Reserve Bank (SARB) new mortgage loan numbers remain very weak compared to prior years, it is believed that the mildly diminished rates of year-on-year decline in value of new mortgage lending indicate a household sector that has begun to respond positively to sharp interest rate cuts, and that moderate strengthening in the growth rates (slowly away from negative to towards positive growth) will follow. In the coming quarters, new mortgage value growth is expected to rely increasingly on a stronger economy, with the SARB Leading Indicator having started to point the way up, and such mild improvement is expected to lead House Prices slowly out of deflation in 2010.

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John's insight - Household credit risk Sept 09

JohnL — Fri, 04 Sep 2009 08:46:00 GMT

The release of the September SARB Quarterly Bulletin makes the economic and household sector picture for the 2nd quarter of 2009 more complete. But this is not to say that the picture is a good one.

Real disposable income showed even more extreme negative growth than in the first quarter despite slightly less real economic contraction in the quarter, and it remains clear that the result of severe pressure on incomes is that the household sector is battling to “de-leverage” despite a sharp cut-back in new borrowing. Our “Debt-Service Risk Index” therefore remains at high levels as a result of the ongoing high level of overall indebtedness, and has actually risen mildly over the past 2 quarters. The most recent quarter’s rise was due to the diminishing scope for further interest rate reduction. The most recent 2nd quarter reading of 6.3 is still lower than the 7.1 risk peak reached in early-2006, but it is nevertheless on the high side, given a multi-decade average of near 5. So, while interest rate cuts have helped improve the household financial and debt servicing situation somewhat, it is a “HIGH RISK” improvement in credit quality due to the ongoing high level of indebtedness.

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John's insights - Aug FNB House Price Index

JohnL — Tue, 01 Sep 2009 07:31:00 GMT

The FNB House Price Index’s year-on-year decline continued in August, but for the 2^nd successive month we saw a diminishing price deflation rate, with the index starting to show clearer signs that the market is starting to stabilise. On a year-on-year basis, the index declined by -7.4% in August, a significant improvement on the revised -8.5% deflation rate for July. Click here for more: (Please visit the site to view this media)

Second quarter – Ethekwini - FNB Residential Property Barometer

JohnL — Wed, 26 Aug 2009 19:25:00 GMT

eThekwini experiences 4th consecutive quarter of strengthening demand activity

The Second Quarter Durban-Pinetown region (eThekwini Metro) FNB Residential
Property Barometer pointed to a further increase in activity levels in the region, the
fourth consecutive quarter of improvement from the low point of the 2nd quarter of
2008. The 2nd quarter’s further rise is positive, especially in that it took place in spite of
possible negative seasonal factors at play in that quarter.

The Property Barometer is a survey of a sample of estate agents in the major cities of
the country regarding their personal experience of market conditions.

The main Barometer question relates to the level of demand activity, and agents are
asked to rate the level of demand that they experience on a scale of 1 to 10.

From a low of 3.27 in the 2nd quarter of 2008, eThekwini demand activity was back
above 5, at 5.14, in the 2nd quarter of 2009. The second quarter survey was
undertaken in mid-May, shortly after the Reserve Bank’s announcement of a further 1
percentage point interest rate cut at the end of April to bring prime rate down to 12%.

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