“Whilst they still point to a very well balanced market, FNB’s Valuers don’t appear overly impressed with Residential Demand growth as of late. Rather, they perceive significant supply constraints as key in maintaining market balance. However, if demand has started to weaken, it should be merely a matter of time before supply constraints are alleviated somewhat. Therefore, the results of the July FNB Valuers’ Market Strength Index, which point to a recent month-on-month decline in the Demand Rating, after some strengthening earlier in 2015, suggest that we may not see the mild house price inflation acceleration of recent months continuing for too long,” says John Loos.
FNB’s Valuers, as a group, appear to confirm what the FNB House Price Index is telling us, and that is that the residential market remains in a well-balanced state.
The FNB House Price Index reflects a well balanced market with its low but slightly positive house price growth in real terms (when adjusted for CPI inflation), while the FNB Valuers’ Market Strength Index indicates this with an index level of 51.23, which is just above the “break even” level of 50 above where the valuers rate residential demand as stronger than supply.
The FNB Valuers Demand Strength Rating has edged up in recent years from lows around 47 (Scale of 1 to 100) in 2009 to its July 2015 level of 55.89.But it isn’t all about demand strengthening. In similar vein to our FNB Estate Agent Survey, the valuers have pointed to mounting residential supply constraints since early-2012, with the FNB Valuers Residential Supply Rating declining from 58.47 in January 2012 to 53.43 by July 2015.
The Supply Rating is therefore currently lower than the Demand Rating, and this translates into an FNB Valuers Market Strength Index (which reflects the difference between Demand and Supply Ratings) hovering at levels above 50 since a stage of 2014.
While the balance between supply and demand in the residential market remains good, according to the group of valuers, they have seen a broad slowdown in the pace of market strengthening since early-2014.
On a year-on-year basis, the rate of increase in the FNB Market Strength Index has broadly slowed to 3.5% by July 2015, significantly lower than the 7% high recorded in March 2014.
Viewing the more volatile month-on-month fluctuations in the Market Strength Index, the rate of increase accelerated from a May rate of +0.14% to +0.27% in July, after some prior months of slowing growth. This appears supportive of the mild renewed acceleration in the month-on-month rate of house price inflation more recently.
Interesting, though, is that the valuers don’t attribute the renewed July month-on-month growth acceleration in the Market Strength Index to accelerating residential demand growth. Demand growth had indeed accelerated mildly in from February to April, perhaps providing some support for the more recent acceleration in house price growth. But more recently, in June and July they have perceived slowing demand growth, into negative territory to the tune of a -0.32% drop in July. What has led to 2 months of higher growth in the Market Strength Index in June/July then? A simultaneous speeding up in the month-on-month rate of decline in the Residential Supply Rating recently.
In short, therefore, the FNB Valuers don’t appear overly impressed with Residential Demand growth as of late. Rather, they perceive significant supply constraints as key in market balance. However, if demand has started to weaken, it should be merely a matter of time before supply constraints are alleviated somewhat. Therefore, the recent month-on-month decline in the Demand Rating, after some strengthening earlier in 2015, suggests that we may not see the mild house price inflation acceleration of recent months continuing for too long.
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