Through the Summer Quarters, FNB’s All Commercial Property Performance Indices, compiled from its valuations data (heavily pertaining to the smaller “owner occupied segment”), have pointed to something of a stronger period in the commercial property sector. The past 4 quarters have seen the All Commercial Property average price growth rate accelerating, appearing to track the direction of the FNB Residential Property Price Index quite well.

The past 2 quarters have also seen a resumption of decline in the FNB All Commercial Vacancy Rate Index, after a previous rising trend through last winter, while capitalisation rates are believed by FNB’s valuers to have declined further.

Investment Property Databank (IPD) data for 2011, released in March, is supportive of the FNB indications of a late-2011 improvement, with higher total property returns recorded in the entire year compared to the IPD’s earlier 1st half 2011 update, implying a stronger 2nd half.

However, whereas 2011 saw improving commercial property fortunes as the year progressed, 2012 may prove to be the opposite, with some global and domestic economic indicators starting to hint at a “softer patch” approaching.

A recent decline in the JP Morgan All Industry Purchasing Managers Index is telling in this regard, while organisations such as the IMF, the World Bank, the UN and indeed our own Reserve Bank had started the year projecting slower overall economic growth for 2012 compared to 2011. Recession talk in the troubled Europe has increased in recent weeks, while US economic growth had already slowed mildly in the 1st quarter of 2012 compared to the previous quarter.

Domestically, we haven’t yet felt too much in the way of the impact of a creaking global economy. However, SA’s own Manufacturing Purchasing Managers Index has declined for 2 consecutive months in March and April, suggesting slowing manufacturing output growth. Accompanying this has been a mild slowing in month-on-month FNB house price growth in the same 2 months, an early hint that the economy may be starting to cool at least in the residential component already.

Real retail sales growth was still strong as at the 1st quarter, with the year-on-year growth rate measuring 6.9% for the 3 months to February. However, this is slightly down from its peak 7.9% year-on-year growth rate for the final 3 months of 2011, a further early hint of moderation in the economy.

On the interest rate side, in recent days we have seen government long bond yields just a slight bit off their best levels as global jitters heighten and some capital flows to “safe havens”. The impact of this has also been seen in a weaker rand moving weaker than USDZAR8.00 in recent days.

A combination of slowing economy, which could once again raise vacancy rates, and a rise in long bond yields as global economic jitters are renewed, could be expected to see capitalisation rates rise mildly towards the 2nd half of the year, exerting downward pressure on real commercial property values after a recent period of relative strength.

Download full article: Commercial Property Review _ Q1 2012

GAUTENG ESTATE AGENTS POINT TO SIGNIFICANTLY STRONGER DEMAND IN THE 1ST QUARTER OF 2012

The 1st Quarter 2012 FNB Estate Agent Survey, completed in the month of February, came out with a mildly more positive national view of the domestic residential property market, largely thanks to a significant improvement in the market perceptions of the Gauteng Region’s estate agents surveyed. By comparison, the Coastal Metro Regions’ agents remained more subdued.

The FNB Estate Agent survey is of a sample of estate agents predominantly in SA’s major metropolitan regions (Gauteng, Cape Town, Ethekwini and Nelson Mandela Bay). The 1st question asked to agents is with regard to their perceptions of residential demand in their areas, a subjective question on a scale of 1 to 10, with 10 being the strongest level of demand.

The 1st quarter Gauteng Residential Demand Activity Indicator rose significantly from the previous quarter’s 5.86, to 6.51. By comparison, the combined Coastal Regions’ Demand Activity Indicator was almost unchanged at 5.39 in the 1st quarter from 5.38 in the previous quarter.

We caution about the interpretation of the 1st quarter Gauteng improvement, as the 1st quarter is generally a seasonally strong period. But the difference between Gauteng and the rest of the major metro regions is now significant, and perhaps ties in with the Economists.co.za major provincial economic barometers which suggest that the Gauteng economy has been the strongest of the major provincial economies recently.

In order to attempt to eliminate seasonal factors, we calculate the year-on-year percentage change in the Demand Activity Indicator. This approach suggests an improving performance in the Gauteng Region, with year-on-year percentage change improving from +1.2% in the previous quarter to +4.7% in the 1st quarter of 2012.

Examining the difference between the Gauteng demand activity rating and that of the combined Coastal Metros, it becomes apparent that as residential market recoveries are gathering steam, as was the case around 2004 and again in 2009/10, agents in the Coastal Metros appear to experience market conditions more positively than those in Gauteng. With something of a lag, however, Gauteng conditions appear to overtake those of the Coastal Regions, and the margin by which Gauteng’s Demand Activity Indicator exceeds that of the Coastal Regions has widened to a level similar to a stage of 2005.

The greater demand strength appears spread across Gauteng, with both Joburg’s (6.54) and Tshwane’s (6.38) demand activity ratings exceeding those of Cape Town (5.43), Mandela Bay (5.73) and Ethewkini (5.18).

GAUTENG ESTATE AGENTS SUGGEST A SLIGHTLY MORE “REALISTICALLY PRICED” MARKET IN THE 1ST QUARTER

In order to examine the balance between supply and demand, or otherwise put the level of pricing realism in the market, the Estate Agent Survey asks agents to estimate the average time that properties remain on the market in their areas prior to being sold.

In the 1st quarter, Gauteng’s average time on the market declined from the previous quarter’s 18 weeks and 2 days, to 15 weeks. From quarter to quarter, this figure can be volatile, but the smoothed trend line that we have created, using a statistical smoothing function, has also declined slightly as of late.

This average time on the market still remains high, however. And read in conjunction with the high percentage of sellers being required to drop their asking price to make a sale, the market can still be said to be unrealistically priced.

The percentage of properties sold at less than asking price was 87%, according to the survey, which was only a very slight improvement on the 88% recorded in the previous 2 quarters.

Furthermore, we ask agents to estimate the average percentage asking price drop on those properties where a price drop is required to make the sale. This average drop has also moderated mildly from -13% 2 quarters prior to -11% in the 1st quarter of 2012.

THE 1ST TIME BUYER COMPONENT OF RESIDENTIAL DEMAND HAS IMPROVED DRAMATICALLY SINCE 2009, BUT MAY BE LEVELLING OFF

1st time buyer demand in Gauteng remained high in the 1st quarter of 2012 at 26%. This was down from the previous quarter’s 28%. One must bear in mind that this number can be volatile from quarter to quarter, but the smoothed trend line appears to show a flattening out after 2 years of steady increase in the 1st time buyer percentage.

At 26%, the Gauteng 1st time buyer percentage remains higher than the coastal 1st time buyer percentage of 24%, and has been consistently above the Coastal percentage since the 2nd quarter of 2009.

GAUTENG RESIDENTIAL SUPPLY APPEARS TO BE MORE CONSTRAINED IN THE 1ST QUARTER

While bad news for estate agents, residential stock constraints are good from a point of view of market strength and property price performance.

Measuring supply relative to demand is admittedly challenging. However, when asking agents about their market expectations in the near term, we allow them to provide a list of factors that influence their expectations, both in a positive and a negative way. In the 1st quarter of 2012, we saw a significant rise in the percentage of Gauteng agents citing “stock constraints” as an issue, to 16%, from 4% in the previous quarter.

An increased supply constraint comes as little surprise, given the very significant increase in Gauteng’s residential demand rating in the 1st quarter, and would appear to explain the acceleration in average house price growth in Gauteng in the 1st quarter as per the FNB Gauteng House Price Index.

ON THE SELLING SIDE, AGENTS STILL SEE SIGNIFICANT FINANCIAL STRESS-RELATED SELLING

What is interesting is that, while our Gauteng survey respondents have indicated a solid improvement in residential demand in the 1st quarter, this does not mean that they are seeing low levels of financial stress. To the contrary, they indicate still very significant levels of financial pressure amongst homeowners, estimating that 21% of sellers were selling in order to downscale due to financial pressure in the 1st quarter of 2012.

However, there are a significant number of homeowners who are financially strong, and this is perhaps witnessed in the estimate that 17% of sellers are selling in order to upgrade.

HOW GAUTENG AGENTS SEE THE NEAR TERM OUTLOOK

In terms of expectations of demand in the near term, from late-2010 onward we have seen a broadly declining trend in the percentage of agents expecting residential demand to strengthen in the quarter following the survey.

This was probably to be expected, as interest rate reduction by the Reserve Bank slowed to a snails’ pace after a series of rapid cuts to August 2009. With little obvious to further drive the market stronger since 2010, agent expectations have gradually flattened out.

This broad flattening trend in near term expectations is true for both Gauteng and the Coastal Regions. However, as at the 1st quarter of 2012, Gauteng agents surveyed returned a more positive expectation, with 31% of them expecting market activity to increase in the 2nd quarter, compared to only 18% of respondents in the case of the Coastal Regions.

When asking Gauteng agents for the factors influencing their near term expectations, the tight credit environment remains a key perceived negative, with 15% of agents pointing to the “National Credit Act” and 14% to “strict credit environment” as key factors in their world. As far as negative factors for agents go, the credit environment is followed by 16% of agents citing “stock issues” as a factor.

However, “Consumer Positive Sentiment” comes up as the most significant positive factor, with 17% of agents pointing to this factor as a positive influence., while 15% point to interest rates as a key factor. Interest rates and their low levels are generally seen as positive.

In order to eliminate the strong influence of seasonal factors, we aggregate the results for agents’ near term expectations on a 4-quarter moving average basis, and the result is what we call the FNB Home Buying Confidence Indicator. The Indicator is on a scale of -1 to +1, with a -1 number assigned to a “weakening expectation” by an agent, a rating of zero to an “unchanged” expectation, and a +1 rating to a “strengthening” expectation.

Here, with seasonal factors eliminated, we see the 1st quarter Gauteng Home Buying Confidence Indicator declining further on the previous quarter’s level, from 0.21 to 0.17. The agents surveyed, therefore follow a broad trend of moderating expectations. What we have seen, however, is that the Gauteng market appears to lag the Coastal Metro markets. In 2009/early-2010, the Coastal Confidence Indicator was consistently higher than the Gauteng Indicator. Since then, it has been the other way around.

This time lag witnessed in the Estate Agent Survey also appears to show in the Gauteng House Price Index, whose year-on-year price growth was well-down on the national average rate in 2010, but which has since more-or-less tracked the national price growth rate as from 2011.

Download full report: Gauteng Estate Agent Survey_1st Quarter 2012

The FNB Estate Agent Survey shows estate agents experiencing a mildly stronger residential property market performance in the 1st quarter of 2012.

ESTATE AGENTS POINT TO STRONGER DEMAND IN THE 1ST QUARTER

The 1st Quarter 2012 FNB Estate Agent Survey, completed in the month of February, came out with a mildly more positive view of the domestic residential property market. The improvement was witnessed both in terms of improved demand in the quarter, as well as some improvement in the balance between demand and supply, or otherwise put an improvement in “pricing realism”.

The survey is of a sample of estate agents predominantly in SA’s major metro regions. The 1st question asked to agents is with regard to their perceptions of residential demand in their areas, a subjective question on a scale of 1 to 10, with 10 being the strongest level of demand.

The 1st quarter Residential Demand Activity Indicator rose noticeably from the previous quarter’s 5.66, to 6.05.

Some care should be taken with interpretations, however, as the 1st quarter is generally a seasonally strong period. But South Africa did also experience better economic growth late in 2011, which is supportive of employment and disposable income growth, and thus of residential purchasing power, and this may also play a positive role.

The percentage of agents reporting their areas to be at “very active” activity levels, i.e. 9 or 10 ratings, remains relatively low, but has risen for the 3rd consecutive quarter to 5% as at the 1st quarter of 2012, up from a low of only 1% as at the 2nd quarter of 2011.

In order to attempt to eliminate seasonal factors, we calculate the year-on-year percentage change in the Demand Activity Indicator. This approach suggests a very stable performance, although no fireworks yet, when ignoring seasonal factors, with year-on-year percentage change improving from -2.2% in the previous quarter to an “almost insignificant” -0.3% in the 1st quarter of 2012.

Other indicators emanating from survey suggest that there was an improvement in the balance between demand and supply in the residential market too, something that is not only driven by demand but by availability of stock for sale as well. This is mildly encouraging from a price performance point of view.

ESTATE AGENTS SUGGEST A SLIGHTLY MORE “REALISTICALLY PRICED” MARKET IN THE 1ST QUARTER

In order to examine the balance between supply and demand, or otherwise put the level of pricing realism in the market, the Estate Agent Survey asks agents to estimate the average time that properties remain on the market in their areas prior to being sold.

In the 1st quarter, this average time on the market declined from the previous quarter’s 17 weeks and 6 days to 15 weeks and 6 days. It must be borne in mind that this estimate can be volatile from quarter to quarter, but the smoothed trend line that we have created, using a statistical smoothing function, also declined mildly in the 1st quarter.

This is a positive development, but 15 weeks and 6 days remains a lengthy time on the market, and judging from the healthier market days prior to 2008, a level nearer to 8 weeks (2 months) on the market appears to be the benchmark for a “healthy” market, so there is still some way to go.

The percentage of properties sold at less than asking price was 88%, according to the survey, which was also a slight improvement on the previous 2 quarters’ 91% and 90% respectively. Once again, moderate improvement but still a high percentage.

Furthermore, we ask agents to estimate the average percentage asking price drop on those properties where a price drop is required to make the sale. This average drop also moderated mildly from -13% in the previous 2 quarters to -11% in the 1st quarter of 2012.

THE MORE CYCLICAL 1ST TIME BUYER COMPONENT OF RESIDENTIAL DEMAND HAS ALSO IMPROVED IN THE 1ST QUARTER

1st time buyer demand tends to be more cyclical than the total market. This is arguably because many young buyers have more flexibility than established households, being able to delay their own formation of a new household by remaining in their parent’s home for longer during tougher property and economic times, or by often remaining in a rental property for longer.

The level of 1st time buying, therefore, is also a good indicator of whether market conditions are improving and, given this group’s high dependence on credit, possibly also an indication of whether credit is becoming easier to obtain.

And indeed, the FNB Estate Agent Survey showed a further slight improvement in 1st time buying, expressed as a percentage of total buying, from 24% in the previous quarter to 25% in the 1st quarter, the 2nd successive quarter of improvement, and now very significantly higher than the 12% low point reached in the 3rd quarter of 2008.

RESIDENTIAL SUPPLY MAY ALSO BE BECOMING A LITTLE MORE CONSTRAINED, WHICH IS GOOD FOR MARKET PERFORMANCE

Trying to gauge the strength of supply of residential stock through asking survey respondents for their opinion is admittedly a tall order. When asking agents about their market expectations in the near term, we allow them to provide a list of factors that influence their expectations, both in a positive and a negative way. In the 1st quarter of 2012, we saw something of a spike in the percentage of agents citing stock constraints as an issue to 16%, from 7% in the previous quarter.

What this hints at is that the improvement in the balance in the market, as witnessed in a quarterly decline in the average time on the market, may have partly been due to a demand improvement, but also partly due to some increase in residential supply constraints.

ON THE SELLING SIDE, AGENTS STILL SEE SIGNIFICANT FINANCIAL STRESS-RELATED SELLING

Whilst our survey respondents have indicated a picture of mild improvement in the residential market, they do nevertheless point to financial pressure amongst households still remaining high. When asked to provide an indication of the reasons as to why people are selling their properties, in the 1st quarter they estimated that 20% of sellers were selling in order to downscale due to financial pressure. This is slightly down from the 21% of the previous quarter, but remains a very high number.

This arguably needs to be read in conjunction with the percentage of sellers selling in order to upgrade, which remained unchanged at 17% of total sellers in the 1st quarter.

These 2 reasons for selling are arguably the 2 most important indicators in the survey of financial pressure/constraints experienced by homeowners. The gap between the two has closed significantly since early-2009, but the level of downscaling due to financial pressure remains high.

HOW AGENTS SEE THE NEAR TERM OUTLOOK

In terms of expectations of demand in the near term, the 1st quarter agent survey returned a mediocre response, which could perhaps be expected as we head into the winter quarters.

We ask them for their expectations of residential demand strength in the near term, i.e the three months subsequent to when the survey takes place, requesting them to choose between 3 options, namely the market will “strengthen”, “weaken”, or “remain the same”.

In the 1st quarter survey, only 26% of respondents expected an increase in demand levels in the 2nd quarter of 2012. This is admittedly up from the lowly 17% recorded in the 4th quarter of last year, but remains relatively low.

When asking agents for the factors influencing their near term expectations, the National Credit Act comes up as the most common factor. It is seen in a negative light, with 17% of agents believing that this Act makes it difficult to obtain finance for home buyers.

The factor that has moved up into 2nd place is that of “stock constraints”, which an increased 16% of agents cite as a problem from their point of view. This group say people are holding on to properties, while there is little in the way of new developments. From a market returns point of view this is good news. From an agent point of view this is a negative, as their businesses are based on turnover, and this constrains it.

In 3rd place 14% of agents cite a strict credit environment as a negative issue (which can be lumped together with the NCA factor). Against this a lesser 7% believe that banks are more relaxed, and see this as a positive. Overall, therefore, it appears that more still see conservative bank landing as a key issue.

In 4th place, 14% of agents cite positive consumer sentiment as a factor influencing their near term expectations, while a lesser 9% point to “economic stress/general pessimism” as a negative factor.

Therefore, the sample of agents surveyed is not overly optimistic with regard to its near term expectations, despite experiencing some market improvement in the 1st quarter. More perceive their clientele to be generally optimistic than those who perceive pessimism, but the “strict credit environment/Credit Act restrictions come up most often as constraints on the market.

IN SUMMARY – AGENTS POINT TO MILD IMPROVEMENT IN THE RESIDENTIAL MARKET, BUT FINANCIAL STRESS STILL REMAINS SIGNIFICANT, AND THEY HARBOUR MODERATE EXPECTATIONS REGARDING THE NEAR TERM

The FNB Estate Agent Survey is a useful tool with which to gain insight into residential market trends first hand, because estate agents experience changes in the market arguably before any of the other market role players.

In the 1st quarter Estate Agent Survey, the sample of agents surveyed suggests some mild strengthening in the market. They saw demand strengthening, the supply of residential stock is seemingly becoming more constrained for some, the average time of properties on the market declined, and slightly less sellers having to drop their asking price to make the sale.

Much of this improvement can be attributed to seasonal factors, but it is possible that stronger economic growth since late-2011 is playing a role through boosting household disposable income and thus residential purchasing power.

Agents do also, however, point towards a still-very significant level of financial pressure, which manifests itself in a still-high percentage of sellers downscaling due to financial pressure, and this should be a concern given that interest rates offer huge relief at their current multi-decade lows.

The agents surveyed harbor moderate expectations regarding near term future activity, with many still citing the tight bank lending environment as a key constraint on the market.

Download full report:

GAUTENG HOUSING MARKET GAINING TRACTION EARLY IN 2012

The long period of low interest rates, and a recession fading in the memories of many, appears to be gradually putting Gauteng’s property market on a better footing.

The FNB Gauteng House Price Index showed a further slight acceleration in the 1st quarter of 2012. From the 1st quarter a year ago, the average house price has risen 6.8% to the 1st quarter of 2012. This is now very near to the national average price growth rate of 7.1% for the 1st quarter of 2012, and is the 3rd successive quarter of strengthening price growth in the province. This is also the highest price growth rate in the Gauteng House Price Index since the 2nd quarter of 2008.

Gauteng, being a very diversified services-driven economy, and with its property market being overwhelmingly primary residential demand-driven, is typically less volatile than many of the country’s smaller property regions. Therefore, it appeared to experience less price decline in 2009 than did the country as a whole, while also showing significantly less price increase during the “mini-recovery” of 2010 after the big fall in interest rates in 2009.

But now, about two-and-a-half years after the major interest rate cuts of 2009, finally the province’s market appears to be gaining more “traction”.

In real terms, too, with consumer price inflation at just above 6%, it would appear that the province’s house price growth rate has moved into slightly positive terrain.

The average property transaction price for Gauteng was R866,806 in the 1st quarter of 2012, according to FNB’s data. While now improving, the recovery has been tough going, and this price level is only 9.3% higher than the level reached in the 2nd quarter of 2008, which was just before price deflation set in in the province’s market.

BY METRO, THE GAUTENG RESIDENTIAL MARKET STRENGTH APPEARS TO BE MORE IN THE CITY OF JOBURG METRO

Breaking it down by major regions in Gauteng, it would appear that the province’s major metro , namely City of Joburg, has recently shown the most strength in its property market of the 3 major metros, the other 2 being Ekurhuleni and Tshwane.

This emerges in both the average price growth rates as well as in FNB Valuers’ Average Market Strength ratings by metro.

Note: When an FNB valuer values a property, he/she is required to provide a rating of demand as well as supply for property in the specific area. The demand and supply rating categories are a simple “good (100)”, “average (50)”, and “weak (0)”. From all of these ratings we compile an aggregate demand and an aggregate supply rating, which are expressed on a scale of 0 to 100. After aggregating the individual demand and supply ratings, we subtract the aggregate supply rating from the demand rating, add 100 to the difference, and divide by 2, so that the FNB Valuers’ Residential Market Strength Index is also depicted on a scale of 0 to 100 with 50 being the point where supply and demand are equal..

In the 1st quarter of 2012, the FNB Market Strength Indices per Gauteng Metro pointed to the City of Joburg having the best balance between supply and demand, at a level of 49.4, just shy of the crucial level of 50 at which the demand rating would match the supply rating.

By comparison, the Tshwane (45.48) and Ekurhuleni (45.65) markets appear a little bit less “balanced”

These differences in the perceived balances between supply and demand appear to manifest themselves in mild differences in average house price growth.

The FNB City of Joburg Price Index rose by 7.2% year-on-year in the 1st quarter, compared to lower 3.5% rates of increase for both Tshwane and Ekurhuleni in the same quarter.

COMMENT – PERCEPTIONS OF THE CITY OF JOBURG RESIDENTIAL MARKET

From our valuations activities in the region, our perception is that Gauteng’s market stability currently lies in and around its key City of Joburg “Northern Suburbs” business nodes. The Northern Suburbs are not immune to recessionary shocks such as the one of 2008/9, but a greater shortage of land for development does assist in supporting the property values in these areas. In addition, during the mediocre economic performance of recent years, the economies of the region’s prime business nodes are believed to hold up better, as many corporates streamline costs by centralizing certain functions to head offices, many of which are in Joburg’s northern business nodes.

By comparison, our feeling is that the West Rand residential market doesn’t quite possess the market strength of the northern suburbs, possibly still dealing with supply overhangs created by a building boom of a few years ago, which we perceive have been far more extreme than the building boom of the northern suburbs, due to greater land availability in parts of the West Rand.

Looking forward, rising congestion and transport costs (helped on by possible SANRAL Toll Road implementation) are also likely to benefit Joburg’s northern suburbs relative to the other major regions of “Greater Johannesburg”, as this sub-region is arguably the province’s key commuter destination.

Finally, also a probable source of support for the overall City of Joburg residential market is the fact that this metro possesses the prime “former township” region around Soweto. Soweto has been at the forefront of the transformation from a “dormitory town” township to a more suburban-like character with major improvements in the area of retail and services. This is significantly improving its popularity as a place to live, which in turn is supporting the “township “ component of the City of Joburg’s property market.

Download full article:FNB Property Barometer_Gauteng_March 2012 House Price Index

HOUSE PRICE GROWTH ACCELERATED FURTHER IN MARCH

The FNB House Price Index showed a further slight acceleration in March, up from a revised February growth rate of 7.1% to 8% year-on-year. This is the highest year-on-year growth since June 2010.

In real terms, too, as at February the index showed a mild increase to the tune of +0.9% year-on-year, with consumer price inflation in February having been slightly lower than house price growth in that month, at 6.1%.

This means that, since the real house price peak reached in March 2008, real house prices (house prices adjusted for CPI inflation over the period) were -11.5% lower at February 2012, while in nominal terms they were +11.8% higher than March 2008.

However, compared to price levels at the inception of the FNB House Price Index back in July 2000, real prices were 69.4% higher as at February 2012, while nominal price +226.8% higher as at March 2012.

We attribute the recent mild improvement in house price growth in part to a late-2011 uptick in real economic growth. SA’s gross domestic product (GDP) number for the 4th quarter came in at a quarter-on-quarter annualized rate of. 3.2%. This was higher than the previous quarter’s weak 1.7%.

While job creation emanating from an economy that has moved out of recession a few years ago has not been spectacular, perceived job security for many may have improved significantly, as one would think that a growing economy no longer retrenches as much as it may have been doing during and just after the 2008/9 recession.

In addition, interest rates have been low and stable for a long time now, with interest rate cutting in the current cycle having started as far back as December 2008. As mentioned in previous reports, lenders and borrowing households alike are generally “pro-cyclical” in their behavior, and as the recent history “improves”, and bad events such as the 2008/9 recession and the 2008 interest rate peak fade in the memories, so too their perceptions of risk usually improve. While this is perhaps a flawed way to look at risk, it is a human reality for many.

Furthermore, the currently abnormally low interest rates do mask a lot of the underlying household financial frailties that still exist. Households may fall into the trap of having an inflated opinion of how solid their financial situation is, while it is more difficult for banks in these relatively good times to assess the financial strength of a borrower, than what it would have been back around 2008 in the period of high interest rates and recession.

So, while many of the longer term financial risks to the household sector, emanating from still high levels of indebtedness and a very weak savings rate, may not have subsided significantly to date, abnormally low interest rates do create a perception that these risks have subsided, and this may be driving gradually increasing borrower and lender confidence alike in the residential property market.

FNB VALUERS POINT TO DEMAND STRENTHENING AND SUPPLY WEAKENING EARLY IN 2012

The FNB Valuers Market Strength Index shows our valuers pointing to an increase in the average residential demand rating in recent months (see notes at the end for explanation of the Valuers Market Strength Index). They have also started to report a deterioration in supply, which is positive in improving the market balance. And so, the Market Strength Index, which represents the demand rating minus the supply rating, has moved up from a revised 44..9 in February to 45.2 in March.

This level is still below 50, meaning that the supply rating exceeds the demand rating, though, and as such does not yet suggest any major house price growth in real terms to come.

OUTLOOK

Although the world and local economy has been going through something of a good period of economic performance over the past 2 quarters or so, the expectation remains for a slower economic growth year for both the world and local economy.

However, slowing global commodity price growth, helped on by signs of global economic mediocrity, suggests that recorded consumer price inflation in SA should not be problematic in the near term from an interest rate point of view (Real life inflation may indeed be troublesome at present). Indeed, CPI inflation for February declined from 6.3% year-on-year in January to 6.1%, and could indeed return to the 3-6% target range within the next few months. This is expected to persuade the SARB to keep interest rates unchanged for the rest of 2012.

Ongoing low interest rates are expected to lead to further increase in borrower and lender confidence alike, as their perceptions of risk continue to improve. As a result, despite expectations of slower global and local economic growth for 2012 as a whole, we are now of the opinion that average house price growth for 2012 as a whole could achieve a higher, but not spectacular, rate of around 6% compared to 3.2% for the year of 2011 as a whole.

Download full article:March 2012 House Price Index