The beautiful thing about a market economy is that prices communicate the collective actions of thousands of household decisions and become an incredible source of information when determining buying trends and anticipated activity within the short term. The predictability of how a property market will perform as the time horizon grows becomes increasingly difficult. Economists are always looking at long run implications of current affairs.
John Maynard Keynes is famously quoted as saying, "In the long run we are all dead" - an amusing, but accurate, response to the fixation on the long run. Accepting Keynes' point we will restrict our predictions to what is expected for the 2018 year.
As reported by FNB in their House Price Index performance report, we see that house prices on average grew by 3,7% in 2017, a slowing on 2016 and the 3rd consecutive year of slowing annual price growth. What is fascinating is looking at monthly house price growth rather than year-on-year growth in order to highlight the shorter-term trend and therefore what can be expected from the market over the next few quarters.
House price growth peaked at 7% in 2014, then slowed to 4,8% in 2016 and again to 3,7% in 2017. Real house prices after adjusting for inflation therefore actually declined to the tune of -2,4% last year. The general annual economic growth rate was dismal last year at an estimated real growth rate of 0,7%.
When the monthly FNB House Price Index is considered it becomes clear that the property market cycle bottomed out in 2016. From a low point of 1.5% growth in December 2016, the rate increased consistently to the 6.1% recorded in December 2017, even up from the 5.5% in November 2017.
After adjusting for CPI inflation the deflation that had been evident for a while dissipated and by November 2017 the real growth rate had moved into positive territory of 0.8%.
FNB cleverly use the Manufacturing Purchasing Managers Index (MPMI) as a key leading economic indicator as a proxy for economic growth and therefore for growth in the House Price Index.
As this figure dips, which means the manufacturing sector is ordering less as they are looking to produce less, this impacts directly and immediately on the demand for property and its pricing. The MPMI has moved up sharply over the past 6 months and we can expect this to impact favourably on House Prices over the first quarter of 2018.
FNB's prediction for 2018 is for stronger economic growth with an average House Price Index growth rate of 5% expected for the year - up from the 3.7% average of last year.
The changes on the political landscape have lead to an increase in confidence and we know how important sentiment is in supporting a property market characterized by decisions that do look to the longer term. The first quarter of the year is typically a seasonal peak in property market buying activity and we can expect a spike in demand for homes along the Dolphin Coast over the next three months.
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