FNB House Price Index - March 2009

The year-on-year decline in the FNB House Price Index continued in March to the tune of -7.8%, much as expected, down from a February revised rate of –6.2%. This is despite the FNB Residential Property Barometer already having shown some improvement in residential demand since late-2008, and is believed to be the result of a significant oversupply of stock still prevalent in the market.

Such oversupplies come from a household sector that still faces significant financial stress. On a quarter-on-quarter annualised basis, the SARB reported last week that real disposable income had seen negative growth to the tune of -1.9% in the 4^th quarter of last year, the second successive quarter of negative growth, driven by the onset of recessionary conditions in the South African economy.

The weak economic environment is contributing to a significant amount of “offloading” of property, with the FNB Property Barometer survey reporting estate agents’ estimates that about 26% of total sellers are selling in order to downscale due to financial pressure.

As a result of oversupplies, it remains likely that this situation of national year-on-year house price decline will continue for most of 2009. On a month-on-month basis -2% deflation was recorded, unchanged from the -2% of the previous month.

The Outlook

Little changes to our expected outlook for 2009. Tough economic times make for a slow road back to health in the market. The SARB has cut interest rates by 250 basis points in total since December, implying that the cumulative decline in value of a monthly bond repayment on a R500,000 bond at prime rate is about R912. In such an interest rate sensitive market as the residential market, interest rate cuts and the prospect of more coming, should boost demand, and indeed the FNB Residential Property Barometer survey point to estate agents believing that for 2 successive quarters there has been a mild uptick in demand activity.

However, many economic indicators continue to suggest that we should not expect miracles yet. The SARB Leading Business Cycle Indicator (a good indicator of future economic growth trends) continued its decline as at January to the tune of -14.2%, although some small encouragement is offered by the fact that the last few month’s numbers have suggested no significant worsening in the rate of decline.

It is old news that economic growth turned negative in the final quarter of 2008, but last week we also learned that, in spite of steadily declining household credit growth, a significant decline in disposable income growth in the fourth quarter had halted the declining trend in the household debt-to-disposable income ratio, and that the all-important household debt-service ratio moved more or-less sideways.

The downward trend in debt-to-disposable income ratio is expected to resume in the first quarter, and the debt-service ratio should get additional downward impetus from interest rate cuts this year. Improvements in the debt service ratio are a great predictor of future improvement in mortgage loan default rates, and as such it is realistic to expect that non-performing mortgage loans will start to decline later this year. The bottom line, though, is that weak economic conditions and poor disposable income growth make that progress towards a more manageable household debt situation slower, and this in turn can be expected to contain the pace of residential demand growth as well as the recovery in house price inflation.

Therefore, mild residential demand recovery as 2009 progresses remains the expectation, but year-on-year house price deflation is expected to be with us for most of the year until such time as oversupplies are mopped.