FNB House Price Index trends lower in February

The FNB House Price Index (HPI) kicked off the year on a mildly lower note, averaging 3.7% y/y in February, below the 4% y/y recorded in January and the 3.9% annual average for 2018. This is against our CPI inflation expectation of 4.2% y/y in the same period. Month-to-month, the FNB HPI accelerated to 0.27%, up from 0.15% in January.

FNB's valuers continue to rate current residential housing demand as weakening and supply strengthening, with the FNB Market Strength Index registering a reading of 49.51 (below the 50-mark for the ninth consecutive month). This below-50 reading means that valuers rate residential supply as stronger than demand. These trends aptly explain the declining real house prices and suggest that the market remains slightly in favour of buyers. Indeed, the FNB Estate Agents Survey results show that between 2016 and 2018, the proportion of properties sold below asking price averaged 91.6%, compared to an average of 85.2% three years prior (an increase of 6.4 ppt).

Positively, mortgages have been cautiously accelerating for the last 10 months or so, from a pace of 3.1% y/y in March 2018 to 4.0% y/y by December 2018. This acceleration is, however, in contrast to what the FNB Valuers' Market Strength Index is suggesting - declining demand resulting in an index reading of below 50 points in the last nine months. Interestingly, this phenomenon of diverging trends between credit extension and purchasing activity (or measures thereof) is also replicated in the passenger car market. One explanation could be that the upward trend in credit extension (in this case mortgages and instalment sale credit) is driven more by asset refinancing rather than new acquisitions.

Looking ahead, the prevailing macroeconomic fundamentals point to a muted property market in the near term, with house prices confined within the 3.5% to 4.5% range, against our average annual inflation forecast of 4.7% in 2019. Much will hinge on the evolution of the broader economic fundamentals, particularly employment growth, and whether the current consumer reticence lifts after elections