The Continuing Decline of House Price Inflation

The house price growth decline is currently steadily happening. According to the record of the October FNB House Price Index, the year-on-year inflation rate was 4.4% which proved to be lower than the previous month which was 4.9%. This is actually the fifth month which the decline is experienced starting from the May “mini-peak” although this month proves to be slower than the previous periods.

By using deeds data of transactions by individuals (thus not wholly comparable with the FNB House Price Index for which FNB data is utilised), an estimation of the relative price performance by area value bands in the country’s 6 major metros were made. In the 3rd quarter of 2010, there was a major average price increase in the affordable areas (average price = R409,760) to the tune of 19.7% year-on-year. The 2nd best inflation rate of 12.5% was experienced in the Middle Income Areas (average price = R713,768). This is followed by the High Income Areas (average price = R1.131m) with 11.3%, and lastly the “Top End” areas (average price = R1.915m) on 10.7%.

There are three plausible reasons for a better performance at the more affordable end of the market that can be helpful. First, this segment is possibly geared towards credit and thus is interest rate sensitive. Second reason is that, the affordable segment appears to be less oversupplied during the boom years. Lastly, the financial pressure in the household sector pushed people to look for more affordable homes.

However, as already mentioned, although the decline was a steady movement, the month of October experiences a slower speed than the months before it. The encouraging statistics given by the economic data released during October was already expected. However, for the time being, the FNB Valuers’ Market Strength Index maintains to indicate towards weak demand relative to supply, and it is thus not an anticipated thing that an end to the declining house price inflation rate will happen, given the weak economic environment.

Lastly, on the other hand, the September consumer price index (CPI) release showed a strengthening residential rental inflation. This proves to be beneficial to longer term residential performance, because it may form into higher income yields on property once it is maintained.