Latest House Price Index Stats from ABSA and FNB

What's the Worst Case Scenario?

The latest reports from FNB’s house price index indicate that a drop of 5% is the worst South African consumers can expect before things in the residential property market begin to improve. Before now, FNB’s property watchers have relied primarily on data retrieved from other sources, but the bank has now developed its own index, using details from mortgages approved to produce price inflation figures.

According to FNB, the results of this new index are relatively similar to ABSA’s, with the figures indicating a 2.3% year on year increase in house prices in August. This is down 3.5% from the data recorded in July and reflects a continuing “declining inflation trend”. In real terms, FNB’s property strategist John Loos says that there has been a drop of almost 9% and that basis prices are dropping month to month, with a –0.3% fall in nominal terms in August.

“While month on month house price deflation is already here, year on year price deflation is expected to arrive soon. However, no ‘freefall’ is anticipated. Rather, around a –5% year on year deflation is expected at the worst part of the price cycle in the first half of 2009,” says Loos. He goes on to say that after that, price inflation is predicted to resume late next year “on the back of recovering economic growth and declining interest rates”.

According to FNB’s market sample, the average house price transacted as at August was around R681 000, while the median price was about R550 000. “In reality though, both measures are over-estimates of what the average house value in South Africa really is. This is because higher income households are generally more mobile than low income ones, which means that a greater percentage of total stocks gets traded in middle to upper income areas, as opposed to, for example, black townships,” explains Loos.

Loos argues that if every property could be valued, even RDP housing, regardless of whether it gets transacted, the average median values would be considerably lower. The FNB house price index is calculated using the average value of housing transactions financed by the bank. He says that in order to eliminate outliers from the data sample, transaction values have to be above 70% of the property valuation, but below 130%, while sales concluded above R10m and below R20 000 are excluded.

The strategist emphasized that the house price depicted in indices does not really show the “full extent of residential market weakness”. In fact, “sellers are somewhat inflexible when it comes to dropping their asking price. Some would stay out of the market during these weak times, while others hold on longer to obtain their price, often incurring higher holding costs,” Loos says.

Therefore, sales volumes would probably give a better reflection of the current state of the market than prices. Agents are generally seeing volumes down by close to half of what they were at the same time last year. Meanwhile, ABSA also released their house price index on Thursday and put the average house price at about R962 500. The average nominal price of a medium sized house with an average price of around R946 200 increased by a mere 2% year on year in August, which incidentally is the lowest growth rate since January 1993, this according to ABSA’s senior property analyst Jacques du Toit. Larger houses (up to 400m²) increased by a little over 1% according to the data supplied by ABSA, which brings the average house price to R1 368 000 and small houses increased by just under 4%, bringing the average house price in this sector to about R682 500.

In real terms though, ABSA says that house prices have been falling for the last six months with a drop not far off 10% in July. The bank believes that real house prices are set to drop by another 7% this year, which is the first annual decline since 1999. The nominal growth rate for 2008 is expected at around 4.5%.

“It is, however, only in 2010 that nominal price growth is expected to rise to a level of above 10% again, while real price growth is projected to turn positive in the same year after two years (2008 and 2009) of real price declines,” according to du Toit. He goes on to say that the latter part of this year and early 2009 will probably be “the best time to buy property”.

The information in this article is courtesy of Realestatweb (“Residential property prices: the worst-case scenario”, 4 September 2008).

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