The existing home market is a happier place these days, arguably past its worst state of health, as demand grows off the dismal lows of early-2009 and the acceleration in house price inflation continues.

The FNB House Price Index showed a further increase in year-on-year inflation, from a revised 3.6 percent in January to 5.8 percent in February. This remains largely the result of the big 2009 interest rate cuts, and some moderate bank easing of lending criteria, although a gradually improving economic growth rate must be starting to make a positive contribution too. On a cumulative basis, this implies an 11.1 percent rise in the index since June 2009 (June 2009 being the low point in the recent recession-driven price slump).

Encouraging signs

But, despite encouraging signs, the question is how healthy is the market really?

A good way to describe the current state of the market could be to compare it to an Everest expedition. The expedition has recently summited, conquering the toughest and most dangerous part of the mountain, and is now on its way down to safer places. But the climbing party still remains in the notorious "Death Zone", the part of the mountain above 7000m, and the climbers are still weak from a lack of oxygen. This means that, while recent developments have been positive for the market, the expedition is still at a risky location on the mountain where any unexpected incidents can derail its descent out of "thin air".

Nevertheless, for the observers watching the progress of the expedition from base camp through their telescopes, there are an increasing number of signs that the party is about to cross the 7000m altitude barrier and exit the Death Zone on its way down the mountain and back to the safety of base camp.

The "leading indicator" of improving market health has been the return to positive nominal house price growth. But this alone is an insufficient indicator of good health in the market. We want to be sure that residential demand is moving back into line with supply.

Time spent on the market

Possibly a better indicator of this is the estimated average time of properties on the market, as provided by FNB?s Property Barometer survey. Here, our view is that the market will probably have exited the Death Zone at the stage when the average time of a property on the market prior to being sold declines to below three months, while less than two months would signal the ultimate return to safety and good health. The fourth quarter 2009 Barometer survey put this average time on the market at 13 weeks and two days, almost at the three month mark and steadily declining.

Further confirmation that the market is exiting the Death Zone, and getting back to a point where demand is sufficiently robust to exceed supply, would be a return to "real house price" inflation. Adjusting the January house price average with the most recent consumer price inflation number, the FNB House Price Index showed -2.4 percent year-on-year deflation, less than the previous month?s minus four percent and now perhaps a month or two away from a resumption of positive real price inflation ? a further source of encouragement.

And so, as time passes, an increasing number of economic and property indicators are approaching their "critical" levels as the market strengthens. Many questions still remain regarding the sustainability of the global economic recovery, and thus our own economic and property recovery, while last week?s Eskom tariff hike announcements were bad news for the market.

Article continues on page two...