House prices show improvement

THE FNB House Price Index showed a third successive month of year-on-year increase in house prices for January, after nearly a year of decline.

"This reflects a modest start to 2010, but more important an improving trend," said the report written by FNB home loans strategist John Loos.

There was little change to the expectation that price inflation won't go further than single-digits, with a household sector still under significant financial pressure, and the belief that interest rates are at or near the bottom.

The Reserve Bank has hinted at the possibility of interest rate reduction in the not-too-distant future but, given the "downward stickiness" of consumer price inflation, were further reduction to happen it would be unlikely to be substantial.

In real terms, the market is not quite "out of the woods" with real house price decline persisting on a year-on-year basis, down 3,8percent. The "downward stickiness" of consumer price inflation is a contributor to the ongoing real price deflation.

But the strengthening in the market is expected to continue until around the middle of 2010 at least, with the full impact of last year's interest rate cuts still to feed through, and supported by a moderately strengthening economy, said the report.

It is, however, a mild recovery where primary residential buying is the dominant focus.

The household sector is primarily focused on essential property buying rather than luxury buying.

This is hampering the pace of recovery in areas such as coastal holiday towns, where a far greater percentage of residential buying is typically for non-essential buying purposes.