The mood in the South African residential property market as we enter the new year is “generally more positive” and while it is far from booming, it has shown a solid performance over the past 3 years since 2012.
This is according to the latest FNB Property Barometer, which expects the growth rate in the level of new residential building completions to be the real “highlight” for 2015.
Rising demand has “mopped up excess supply” and more estate agents who participated in the FNB Estate Agent Survey have pointed to shortages in residential units. The improving supply-demand balance has driven some positive house price inflation in real terms over the past 3 years.
The “massive” drop in oil prices and to a lesser degree, food prices, along with a “rand that has recently behaved reasonably well”, promise to drive Consumer Price Inflation down from November’s 5.8% to nearer 4% in the coming months, according to the Barometer.
“The FNB interest rate forecast is for the South African Reserve Bank (SARB) to lift its policy Repo Rate gradually higher from the current 5.75% to 6.5% by year-end, taking Prime Rate from 9.25% to 10%.
“The reasoning behind pencilling in this mild rate hiking at a time when inflation looks set to fall through the floor comes from the SARB’s signalled desire to ‘normalise’ rates gradually upward from what are believed to be ‘abnormally’ low levels by South African standards.”
However, as things currently stand, the interest rate forecast risks lie clearly to the “downside”, and the probability of further rate hiking being postponed by the SARB to a later date must now be quite high, says the FNB Barometer.
“Even if the Bank were to lift rates slightly this year, the positive impact of lower inflation in not only boosting economic growth, but also in translating into higher real disposable income growth, is expected to sustain further growth in housing demand.”
The expectation of stronger Real Household Disposable Income growth in 2015, compared with 2014, leads to a forecast of a further increase in residential demand. However, FNB expects the pace of demand growth to perhaps be slower than in 2014 should the SARB persist with interest rate normalisation. “The reasoning behind a slower rate of growth in demand is the expectation of a mild deterioration in residential affordability as our average house price growth forecast moves up a notch from 7.2% in 2014 to 8.7% for 2015.”
This rate, notes the Barometer, is expected to exceed Average Employee Remuneration, forecast at a lowly 5.3% for 2015, by a significant margin.
However, 2015 may start to lay the platform for slowing affordability deterioration thereafter. “This is because we expect the highlight of 2015 to be a more noticeable surge in levels of residential building completions, with a forecast growth rate in the region of 21.6% in the square metreage of residential building completions for the year.
According to the FNB Barometer, the signs are there. “The FNB-BER Residential Contractors Building Confidence Index jumped from 58 to 69 (Scale of 0 to 100) in the final quarter, continuing a steadily rising trend, while 3rd Quarter 2014 Square Metres of Residential Building Plans Passed surged to 19.2% year-on-year growth.”
While this growth may sound extreme to some, FNB says, to give some perspective, this would still imply that 2015 building completion levels would be -39.5% below the boom time peak year of 2007, and after some years of very low levels of building activity, finally they believe that the time has come for more “meaningful growth”.
“Therefore, although we forecast further strengthening in certain other residential property numbers, including a mild increase in house price inflation, a slight further decline in the Average Time of Homes on the Market, and a further rise the FNB Market Strength Index, we believe that the 2015 ‘highlight’ will prove to be a notable strengthening in the level of newly built residential units coming onto the market.”
This, in turn, is forecast to lead to some easing in residential supply constraints come 2016, resulting in slowing annual house price growth as we move into 2016 and beyond, according to FNB’s Barometer.