3 reasons for the recent house price growth

Category Markets

According to the latest FNB Property Barometer, the year-on-year inflation rate has surprisingly sped up. Find out why this is the case.

7.4% year-on-year increase

In May 2016, the FNB House Price Index recorded a 7.4% year-on-year rate of increase, which is slightly faster than the 7.0% revised rate of April. In real terms average house price inflation was a modest 0.7% year-on-year in that month, reflecting a “still-well balanced market.”

According to Loos and Swanepoel, the return to slightly positive real growth is due not only to rising average house price growth but can also be attributed to some “receding” in Consumer Price Index (CPI) inflation from 7% year-on-year in February to 6.2% by April.

While demand has not been “spectacular” since the 2008/9 Recession, supply constraints have been reported widely and building levels of new homes have remained muted, contributing greatly to the market balance explain Loos and Swanepoel.

According to the barometer, the average price of homes transacted in April was R1,075,033.

On examining the longer term real house price trends (house prices adjusted for CPI inflation) Loos and Swanepoel explain that as of April 2016, the level was +5.3% up on the October 2011 post-recession low. However, the average real house price level remains -18.2% below the all-time high reached in December 2007 at the end of the residential boom period.

Looking back further, the average real price currently remains 67.4% above the January 2001 level. As such, Loos and Swanepoel reckon current real price levels are very high. In nominal terms (when not adjusting for CPI inflation) the average house price in May 2016 was 298.8% above the January 2001 level.

Reasons for the growth

Loos and Swanepoel believe there are several key drivers behind the recent acceleration in average house price growth which is all the more notable given the fact that interest rates have been rising.

  • Firstly, they believe it is possible that some of the acceleration can be attributed to the lagged impact of a higher general inflation environment which has set in in South Africa of late.

  • Secondly, Loos and Swanepoel believe the acceleration may also be due to a slightly better economic environment which manifested during the second quarter of 2016. Statistics linked to the Manufacturing Purchasing Managers Index (PMI) – “one of the key up to date indicators of short term economic movements” – lends credence to this premise.

  • Thirdly, Loos and Swanepoel are of the opinion that a key contributor propping up the National House Price Index growth rate is the strong recent performance of the Western Cape region’s housing market.

“A lot of positive sentiment exists in this region, the country’s second largest economic and residential property region after Gauteng Province [which] along with a significant land constraint has boosted the province’s house price growth into double-digits,” notes Loos and Swanepoel.

The FNB Western Cape House Price Index recorded 12% year-on-year growth during the first quarter.By comparison, the other major regions were significantly slower. Eastern Cape Province recorded 7.6% year-on-year house price inflation in the first quarter, KZN 5.6%, Gauteng, the country’s largest region, rose 3%, and the smaller provinces a mere 1.7%. To quote Loos and Swanepoel, it would, therefore, appear to be very much a Western Cape story in recent times

Source: Private Property, 8 June 2016 

Author: Jackie Gray-Parker

Submitted 23 Jun 16 / Views 1689