FNB notes in its outlook that some early signs of encouragement for the residential market have been witnessed recently after a lengthy spell of bad news.

After reaching near to USD150/barrel, Brent crude currently hovers at near to USD110/barrel, and this has led to the first domestic petrol price cuts in some time.

The oil price decline has been accompanied by some decline in rampant global food price inflation, which is important in moderating domestic food price inflation rates. We know that the SARB put rate hiking on hold at the most recent August interest rate meeting, and such moderations in key global commodity prices may encourage it to continue the sideways movement in interest rates for a considerable period.

OIL PRICES

However, we’re not out of the woods yet, as CPIX inflation has yet to show to us that it has peaked (peak anticipated around September), while global oil prices remain sensitive to geopolitical issues as well as weather patterns in key production areas such as the Gulf of Mexico. Therefore, interest rate reductions are probably some way off, only anticipated to commence in the second quarter of next year.

As such, it is anticipated that the anticipated interest rate and economic growth improvements will not arrive in time to prevent a brief period of year-on-year price deflation late in 2008 (following on the month-on-month deflation already taking place).

However, it is expected that the magnitude of the deflation rate will be limited, and should not go beyond -5% at a stage in the first half of 2009.

It is important to bear in mind the reality that prices have some resistance to deflating due to the tendency of some households to incur increased holding costs as they wait longer for their price, and this means that house price trends won’t fully reflect the extent of residential property market weakness.

As for the factors having a negative impact on sentiment, it is expected that post-Polokwane jitters will subside over time, as minority groups normally do become more comfortable with political leadership changes as time passes, while Eskom appears to have already made strides in normalising the electricity supply following the January crisis. As 2010 draws nearer, it is believed that the football event and the various happenings surrounding it will contribute to a more positive sentiment in the country.

NOTE : The FNB House Price Index is constructed* using the average value of housing transactions financed by FNB. In order to eliminate outliers from the data sample, transaction values must BE above 70% of FNB Valuations Division’s valuation of the property but below 130%, while purchase prices recorded as above R10m and below R20,000 are excluded. The time series generated is then smoothed using a Hodrick-Prescott smoothing function. *data compiled by Ewald Kellerman, FNB Home Loans