Stock constraints appear most acute in Namibia, the Common
(Rand) Monetary Area’s 2nd largest economy. Our FNB Namibia Average House Price
continues to show very strong growth to the tune of 21.4% year-on-year for the
2nd quarter of 2013. That country has had a faster economic growth rate in
recent years than SA, but it is also said that supply constraints around the
capital Windhoek are particularly acute due to limited land availability. Over
the long term, the apparent result of such land constraints has been that our
FNB Namibia House Price Index has risen cumulatively by 515% from the 3rd
quarter of 2000 to the 2nd quarter of 2013, while the South African FNB House
Price Index rose over the same period by a lesser 239%.
Back in South Africa, the supply constraints don’t yet
appear nearly as severe, but they have been mounting, and slow supply growth is
not only an issue in the home buying market. There are clear signals from the
residential rental industry that the rental market fundamentals are
strengthening. While the CPI inflation rate for rentals increased only
marginally in June, low levels of buy-to-let buying since 2008 have gradually
led to mounting supply constraints in the rental market. The major portion of
letting agents are now reporting shortages of rental stock. Get set for
stronger rental inflation, which could see yields resume their rising trend of
recent years, but the downside risk is possible upward pressure on CPI
inflation and possibly interest rates.
On the home buying side, our 2nd quarter Estate Agent Survey
showed 13% of respondents citing stock constraints, not yet severe but higher
than a year or 2 ago. And so FNB House Price Index growth continued to
accelerate mildly in July, From a revised year-on-year growth rate of 6.7% in
June, the July growth rates reached 6.9%. In real terms (adjusting house prices
for general inflation in the economy using the CPI), as at June we were still
seeing mildly positive year-on-year house price inflation to the tune of
+1.12%.
The market does remain cheap for foreigners, however. In
dollar terms, the July FNB House Price Index declined year-on-year by -11%, in
Euro terms by -16.4%, and by -10.2% in UK Pound terms, all of this due to
recent deterioration in sentiment towards SA and resultant Rand weakness. This
weakness has possibly been responsible for some increase in foreigner “bargain
hunting” over the past 2 years, but foreign buying performance doesn’t appear
to be back up to pre-2008 recession levels.
Back to the market in Rand terms and the FNB Valuers’ Market
Strength Index for confirmation of recent trends, and FNB’s Valuers have also
indicated that recent relative market strength has been the result of the
combination of positive residential demand growth as well as a more constrained
supply of residential stock on the market.
Certain high frequency indicators also confirm the recent
period of relative residential market strength. After slowing somewhat in the
Summer months, year-on-year growth in Transfer Duty Revenues came back strongly
in the 2nd quarter of 2013, and as at June were growing by 27.5% year-on-year
in value.
The Reserve Bank (SARB) left interest rates unchanged in
July, with prime rate at 8.5%. So, despite some recent mild acceleration, house
price growth (Namibia excluded) remains lower than prime rate, not making it
wildly attractive for speculators wanting to use cheap credit to profit rapidly
from strong house price growth – a healthy situation. This may also be curbing
the less seasoned buy-to-let investors, many of whom typically (perhaps
erroneously) also base their investment decisions on recent price growth trends
as opposed to yield.
With regards to the South African house price outlook,
the FNBBER Consumer Confidence Index did point to some mild improvement.
returning to very low positive territory (+1) after 4 consecutive quarters of
decline. But such a return to positive territory points to little more than
confidence stabilizing at a very weak level after a major deterioration. SA’s
economic growth rate remains pedestrian, with the SARB again having lowered its
2013 GDP growth projection down to 2% (and FNB’s at 1.9%). Therefore, despite a
recently more positive South African housing market period, it is expected that
the slower period of economic growth since late 2012 will weigh on the home
buying market, restricting the level of supply constraints, and that price
growth will moderate mildly in 2013, averaging nearer to 5% next year after an
expected 6.6% growth rate in 2013.
