The South African economy contracted by 0,7% in the first three months of 2017, following a 0,3% contraction in the fourth quarter of 2016 placing us technically in a recession.
This is the first recession since 2009 but not nearly as severe as the -6,1% contraction we experienced during the 1st quarter of 2009. Recessions are not kind to residential property price growth. The FNB property price index tells an interesting story when we analyse the data.
From July 2015 to June 2016 year-on-year growth was looking good reaching a peak of 7,4% in Oct 2015 and holding firm to 6,3% by June 2016. The second half of 2016 however shows a dramatic change of fortune as the macroeconomics deteriorated rapidly and house price growth went into free fall.
The low point was reached by December 2016 at 1,7%. Real growth however once CPI inflation is taken into account is firmly in negative territory.
The latest figures we have are for May 2017 and April 2017 that show negative real house price growth of -2% and -2,1% respectively. The good news is that since December we have seen growth increase steadily to its current nominal 3,6% as of June 2017.
Although still at half of what we experienced during 2015 it is moving in the right direction. It will be fascinating to see what the 2nd quarter GDP figures look like. Economists do view the housing market as a good leading indicator of economic conditions. Instead of looking at the year-on-year house price growth, economists will often focus on month-on-month changes to try and predict overall economic activity.
What we have seen since March 2017 is that this month-on-month data has weakened even though our year-on-year figures are looking slightly better. It now remains to be seen if our overall economic activity has improved during the 2nd quarter.
To try and answer the question of how prevalent the home re-sales price deflation is in the market, FNB used deeds office data of properties sold by individuals (natural persons). The results show that actual deflation is only moderate. In May 2017 the estimated level of resale price deflation was 10.2% of total sales, which is not significantly different from the 10.1% recorded at the end of 2016.
There has been some increase in the category of homes sold at 0-5% below the purchase price to 2.1% of total sales from 1.69%. Fortunately in the category of homes sold at more than 5% below the purchase price there has not been any meaningful change with the estimate of this category being 8.3% for the 6 months ending May 2017. FNB are predicting a 3% average year-on-year house price growth for 2017.