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The FNB House Price Index, already rising strongly on a month-on-month basis, is probably one month away from resuming year-on-year inflation too.

In October, year-on-year average price deflation was minus one percent, significantly better than September’s revised -3.6 percent rate of decline. On a month-on-month basis, the average price index rose by +3.4 percent, which is unchanged from September. Month-on-month figures should be read with caution, though, as there is an element of seasonality in the numbers.

The overall index level for October stood at 287.1, implying that the average house price still remains 187.1 percent higher than the July 2000 level, the point at which the FNB House Price Index started at a level of 100. The average house value for the month measures to R751 323.

Comment

The October house price numbers are very much as expected. The FNB Property Barometer survey of estate agents informed us of strengthening demand as from late-2008, while as a home loans bank we began to feel the positive impact of this year’s series of interest rate cuts manifesting itself in higher transaction volumes. This was bound to ultimately lead to a resumption of rising prices in some form, and we are now pretty much at that point.

The outlook remains a 'mediocre' one though, as it would appear that the SARB has come to the end of its interest rate cutting phase. There may be an outside probability of a slight further rate reduction, but the Firstrand view is that prime rate is likely to remain unchanged for a lengthy period until late-2010, at which point the next interest rate move is expected to be up. For the time being, the possible end of interest rate cutting should not derail the property recovery, as much of the positive stimulus from interest rate cuts feeds into the market with a considerable lag.

However, by about mid-2010 we expect that stimulus to have fully fed through, implying that an important contributor to the residential market recovery would no longer be there, should our view on interest rates be more-or-less correct. Then it is up to the economy to contribute more strongly.

Can the economy come to the party?

Indications are that this looks to be increasingly the case. The SARB Leading Business Cycle Indicator for August showed a further month-on-month rise of 2.2 percent.

However, we continue to warn against expecting too much. While we do believe that the recession is at its end (for now at least), as mentioned in previous reports, the platform off which the USA hopes to launch its economic recovery doesn’t appear very stable, with that country’s various debt and debt-service ratios still at or near the highest levels in history.

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