In real terms, the October FNB House Price Index declined by -1.9 percent y/y, with consumer price inflation of 6 percent in that month significantly higher than the 4 percent nominal y/y growth in house prices

According to the FNB House Price Index, the November average house price was still 3.2 percent higher than November 2010 year-on-year (y/y).

John Loos, FNB Home Loans property strategist says this represents a slower growth rate than the October revised y/y growth of 4 percent and represents the third consecutive month of slowing y/y house price growth.

The average price of homes traded as recorded in the FNB House Price Index, was R804 242.

In real terms, the October FNB House Price Index declined by -1.9 percent y/y, with consumer price inflation of 6 percent in that month significantly higher than the 4 percent nominal y/y growth in house prices.

Loos explains that in nominal terms, the average house price in real terms is -16.6 percent lower than its long term peak reached in February 2008.

In nominal terms, the index is a marginal +5 percent higher than it was in February 2008.

Compared to July 2000 when the index started, the average price at November 2011 was 209.5 percent higher in nominal terms, and 63.8 percent higher in real terms, he says.

On a month-on-month basis, the seasonally-adjusted FNB House Price Index shows the residential market to already have been in a state of nominal price decline (negative growth) for the past four months.

In November, the extent of this price decline in October was -0.74 percent, which is slightly less decline than the revised -0.89 percent measured in October.

Since the seasonally-adjusted price decline started four months ago, the total decline has been -2.3 percent, he says.

In 2012, a real possibility exists for further interest rate reduction but the bank cautions against expecting major interest rate reduction.

FNB says the market remains very flat and looks likely to remain so for the foreseeable future.

The bank says there is no obvious indication to suggest any marked improvement in house price performance next year.

In 2012, a real possibility exists for further interest rate reduction but the bank cautions against expecting major interest rate reduction.

Given the expectation of a slower economic growth year in 2012 and slight interest rate reduction at best, the average house price growth for 2012 is expected to be still slower than in 2011.

After the 2010 mini-recovery that produced an average house price rise of 6.1 percent for 2010 as a whole, 2011 looks set to end at an average rise of 3 percent.

In 2012, we expect still slower nominal growth at between 1-2 percent.

This would translate into further house price decline in real terms, with consumer price inflation expected to move in the 4 to 6 percent range during next year, says FNB.

Loos says while he believes there is a possibility that interest rates may go down slightly further, he is of the view that for the property sector to place all its hopes on interest rate cuts is as questionable as the mining and manufacturing sectors hoping for a weaker rand to cure all of their ills.

“The reality is that bringing the property market back to health is far more complex than merely cutting interest rates.”

At 9 percent prime rate, the interest rates are at multi-decade lows already, he says.

For the housing market’s longer term health, it is important that the household debt-to-disposable income ratio be brought down to lower levels.

From this point of view, the current level of interest rates appears to strike a good balance, providing relief for highly-indebted households, assisting in a decline in our home loan arrears and non-performing loans in recent years, but on the other hand not yet having encouraged household borrowing growth to accelerate.

“Instead of interest rate cuts, we should rather be writing to Santa hoping for a more significant improvement in the residential rental market in 2012.”

In 2012, smaller homes are expected to be more popular as they contribute to reduced running costs.

He says what appears necessary to improve residential property’s attractiveness as an asset class is a strong rental market coupled with slow capital growth in order to significantly increase net yields on property.

A better-performing rental market is more a function of the economy than of interest rates alone and this depends greatly on the global economy’s performance which is currently fragile, says Loos.

In 2012, Loos has the following expectations:

- the more affordable segments of the housing market will outperform the higher priced segments

- high transport costs due to high fuel prices and Gauteng tolls can support demand in close proximity to business nodes

- smaller homes are expected to be more popular as they contribute to reduced running costs.

Original article: www.property24.com