FNB House Price Index

May house price deflation continues, and we have to wait a little longer for any positive effect from interest rate cuts to become visible.

The FNB House Price Index’s decline continued in May, declining year-on-year to the tune of -11.3%. This represents a deterioration on the revised -9.2% rate of year-on-year decline recorded for April, and was the 6th consecutive month of year-on-year decline in the house price index.

On a month-on-month basis, the rate of deflation was -3% in May.

The price deflation is the result of a sizeable oversupply that has built up in the residential market, with selling due to financial pressure being a key driver of supply. With SA officially now in recession, conditions in the South African economy are hampering the pace of residential demand growth despite a series of interest rate cuts having already taken place.



Outlook

Domestic interest rates have now declined by 450 basis points in total since the start of rate cutting in December 2008. This should bring some stimulus to a very credit-sensitive market such as the residential property market. However, unlike the 2003 aggressive interest rate cutting which took place in good global and local economic times, the current stimulus from interest rates is to a great extent offset by an economic recession which contains growth in household purchasing power.

As such, the expectation of nothing more than a very mild improvement in residential demand during 2009 continues, and with oversupplies still believed to exist on the market, house price deflation is expected to be with us for most of 2009. However, I believe that the worst year-on-year price deflation will show in the figures around mid-year, and that during the second half of the year we’ll begin to see the rate of decline subsiding.

At the most recent SARB interest rate meeting, the Governor did begin to prepare the market for a possible pause in interest rate cutting, so although all future interest rate decisions depend on how future economic events unfold, we should not expect too much in the way of interest rate cutting from here forward.