House-price deflation deepens, says FNB

Year-on-year house price deflation worsened in December to -1,7%, First National Bank (FNB) said on Monday as it released its house price index.

House price inflation, however, for 2008 as a whole averaged +5,2% due to better conditions early on last year, FNB added.

For 2008 as a whole, the average house price was R748 428, which was 5,2% higher than the average of R711 591 for 2007.

The average price inflation rate for the year was significantly down on the 11,2% average for 2007, and represented the fourth year of weakening from the bumper average inflation rate of 29,5% recorded for 2004, “which was the peak year in the most recent property boom”, FNB said.

It appeared that the market for two-bedroom houses and less was where much of the weakness lay, the bank said.

For quarter four of 2008, the average freehold two-bedroom house price (R332 000) declined by -9,6% year on year.

“This represents a deterioration from -6,5% year-on-year deflation in the previous quarter,” FNB said.

The sectional title “two bedroom and less” market fared slightly better but nevertheless also moved into average price deflation in the final quarter of 2008, FNB said.

The average price of sectional title two-bedroom houses (R612 072) declined by -0,4% year-on-year, while the average price of sectional title units with fewer than two bedrooms (R434 535) depreciated by -2%.

FNB found that the three-bedroom market appeared more solid by comparison and still hovered in single-digit price inflation territory, although also on a slowing trend.

The average price for sectional title three-bedroom units (R914 534) showed year-on-year price inflation of 4,1% in the fourth quarter of 2008, down from 5,2% in the previous quarter, while the average price of the mildly more affordable freehold three-bedroom category (R841 819) inflated by 8,7%, down from 9,3%.

“There may be some good reasons for apparent superiority in performance of the three-bedroom market,” FNB said.

Sectional title property
“In the case of sectional title property, it is possible that much of the buy-to-let surge back in the boom years was focussed on this market, as was much of the first time buying attention that we saw at the time.”

According to FNB, that may have explained the sectional title market for two-bedroom units and less showing the highest price inflation of all of the categories back at the peak of the boom around 2004.

However, buy-to-let buying and first-time buying had a tendency to be more cyclical than the more essential primary residential buying.

Hence, a pull back in buy-to-let and first-time buying in the bad times may be the driving force behind the “two-bedroom and less” market now performing worse than the three-bedroom market, because the three-bedroom market is possibly a more primary residential buyers’ market, driven by family demand, FNB noted.

Looking ahead, an expected series of interest rate cuts should have some positive influence on residential demand, although this influence would be partly negated by weak economic growth as the global economic crisis continued, FNB said.

But despite some demand recovery, the bank believed that oversupplies of stock could take a while longer to be mopped up, and as such expected the FNB House Price Index to show year-on-year deflation for the whole of 2009.—Sapa

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