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In order to answer the question as to whether recent house price growth rates are sustainable, one should probably ask the question as to how sustainable this recent strong growth in disposable income is? We think it is not sustainable at recent levels. After a sharp recovery off a low base in income from investments, one would think that this source of income would do as wage income already appears to be doing, i.e. shift lower to get more into line with the pace of general economic growth.

This, in turn, would mean that, even should real economic growth remain at recent annualized levels of around 3%, we would expect disposable income in real terms (nominal disposable income growth adjusted for consumer inflation), to slow from recent strong levels of 5% year-on-year, to closer to 3%.

On top of this, recent weeks have seen increasing concerns regarding global economic growth. US real GDP (Gross Domestic Product) growth slowed from an annualized rate of 3% in the previous quarter to 2.2% in the 1st quarter of 2012, while recession talk in Europe has stepped up a gear of late.

And indeed, examining month-on-month seasonally-adjusted house price growth, it may well be that the growth momentum is starting to subside a little (although one must bear in mind that month-on-month growth can be a little volatile), although this obviously will only seen in year-on-year growth figures with something of a lag.

From a February peak of 1,42% month-on-month, the FNB House Price seasonally-adjusted growth rate has slowed for 2 consecutive months to 1.17% in April.

The recent month-on-month growth surge in the FNB House Price Index, which has taken place over the summer months starting in November 2011, was the 3rd “mini-surge in house prices since the 2008/9 recession dip, and it once again came in tandem with a minor improvement in the economy. This is reflected in the SARB Leading Indicator, which on a month-on-month basis also recently showed its 3rd “uptick” since the recession.

At present, therefore, the residential market’s periodic minor price surges move in a very similar direction to the short term economic fluctuations, with little if anything in the way of “speculative” behavior to drive it in the opposite direction.

Given the current fragility in the world economy, and evidence pointing to global economic growth slowing once again., it appears to early to expect a sustained move to higher house price growth in South Africa.

John Loos

Household and Property Sector Strategist

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