The newly-developed FNB House Price Index shows August house price inflation to the value of 2,3% year-on-year, compared with 3,5% in July. This continues the trend of steady deceleration in year-on-year price increases since early this year, while on a month-on-month basis the index has been showing price deflation since March of this year. The August year-on-year inflation rate is the lowest since January 2002.
In order to obtain an idea of house price trends in real terms, the FNB House Price Index has been deflated with the consumer price index. In year-on-year terms, July saw an 8,8% real price decline, which was the 18th consecutive month of year-on-year real price decline starting back in February 2007.
DRIVERS
The list of negatives for the housing market has gone far past merely including rising interest rates. It has been the combination of rising interest rates and a rising household sector debt-to-disposable income ratio that has driven up debt servicing costs relative to household sector disposable income (debt service ratio).
In tandem with rising debt servicing costs, rising consumer inflation, notably in the areas of food and transport costs, has been eating into disposable income in recent years, while disposable income growth may also be suffering at the hands of a slowing economy which hampers job creation as well as the discretionary portion of employee remuneration.
If the above was not enough, a few key sentiment dampeners have seen an apparent surge in emigration, further hampering residential demand. Minority group concerns following a change in ANC leadership at Polokwane may have played a role, as could the Eskom crisis that played out in January, and don’t underestimate the Zimbabwean Crisis influence.
Periodically, the debate arises as to whether the median price or the average price is a better indicator of property price trends and average levels (though one must not ignore methods such as the repeat sales index).
MEDIAN PRICE
We have calculated a median price from the same data set in order to compare with the average price. While there is some difference, both tell a not too dissimilar a story. What is noticeable though is that for much of the period July 2001 to end-2005 the median price inflation rate was above that of the mean (average), while this situation reversed in 2006 and 2007. When the median inflates above the average, it can point towards an activity shift towards the higher priced end of the market, a shift which can tend to inflate the median price at a more rapid rate than the average, whereas a shift in activity towards the lower priced end can see the median inflating at a lower rate than the average (2006-07).
These two periods of activity shift, first to the higher end and then later back to the lower end are indeed believed to have taken place during the current decade. The demand shift to the higher end of the market during the initial part of the property boom was triggered by rapid interest rate cuts. Prior to upward price adjustments, lower interest rates suddenly made it possible for credit buyers to afford higher priced houses than had previously been the case, and understandably many climbed in.
End of Part One
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