FNB House Price Index drops 9% in 2010

FNB today released its House Price Index for December 2010, which showed that “the year-on-year rate of increase in the FNB House Price Index was 3.6%, which was unchanged from the November revised rate of growth of 3.6%. In real terms, i.e. adjusting for a November Consumer price inflation rate of 3.6% year-on-year, this means that November saw zero percent real change.”

However, accounting for the monetary debasement in 2010 by measuring house prices in terms of sound money, gold, the FNB House Price Index declined by nearly 10% in 2010.  This is because gold priced in SARB funny money increased from R8300/oz at end Dec 2009 to R9300/oz at end Dec 2010, an increase of over 12%, while house prices in SARB funny money terms only rose 3.6%.

Like we’ve been saying, when the fundamentals of something are terrible, and the price wants to decline in nominal Rand terms, and the central bank tries to fight price declines by increasing Rand liquidity and reducing interest rates, prices will still decline in real terms, or relative to other assets with sounder fundamentals.

The commercial banking system holds nearly R1 trillion worth of residential mortgage debt on its books, which is half its assets.  When house prices threaten to fall on a nominal basis, which is likely this year, the SARB is certain to come through with more rate cuts to protect the banking system.  Another 150bps look in order this year as CPI inflation falls toward 0%, the Rand/$ heads below 6.00 toward 5.00, and house prices remain flat in Rand terms.

Just a heads up and more on this another time, but likelihood is rising that we will see a very healthy run higher in SA house prices in Rand terms from late 2011 into 2013.  We are here only talking about nominal Rand price increases, in gold terms house price indices are likely to trend flat to lower.