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First-time 'buyer panic' may be mounting

16 Mar 2015

First-time buyer demand in South Africa is still strong but affordability pressures and "buyer panic" may be mounting. 

An increasing number of first-time buyers appear to be concerned about house price increases and affordability challenges, based on their response to the “buyer panic” survey question. Loos says this is where aspirant first-time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them.

This is according to the 1st Quarter 2015 FNB Estate Agent Survey, which indicates a strong estimate of first-time buying levels expressed as a percentage of total home buying, however, this is down a little off the peak percentage of a few quarters ago. 

"We believe that the mild decline may just point to rising challenges regarding home affordability of late," says John Loos, Household and Property Sector Strategist at FNB. 

According to the sample of agents surveyed, first-time buyers were estimated at 25% of total home buyers, which is "mildly lower than the 28% high of the 2nd quarter of 2014, and the percentage has now been lower than last year’s high point for three consecutive quarters, causing the smoothed trend line to point slightly downward". 

Loos says both the FNB Home Affordability measures, namely, the Average House Price/Average Labour Remuneration Ratio, as well as the 100% Instalment on an Average Home Loan/Average Labour Remuneration Ratio, started to rise in 2014 after prior years of decline, the net result of house price inflation exceeding wage growth, and the minor interest rate hikes last year. 

An increasing number of first-time buyers appear to be concerned about house price increases and affordability challenges, based on their response to the “buyer panic” survey question. Loos says this is where aspirant first-time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them. 

"When such panic sets in, it can cause inappropriately high levels of first-time buying, with a portion of first-time buyers over-extending themselves financially as they attempt to get a foot in the property market 'before it is too late'. 

"This, in turn, can cause market price 'overshoots' or sometimes what economists describe as 'price bubbles' - while the market still appears far from 'crazy', buyer panic must always be a concern where it exists," says Loos. 

The "buyer panic" question is new to the survey, so there is not a long history to analyse. However, he says in the six quarterly surveys that the question has run, the agents surveyed consistently perceived a significant percentage of first-time buyers that were driven by panic, or “fear that if they don’t buy now it will become too costly for them to afford later”. 

The 1st quarter survey estimate stood at 38% of total first-time buyers, up from the previous quarter and further elevated from the 30% of a year ago. 

So, while confidence would still appear to be a key driver in what are still high first-time buyer levels, he says over one third of first- time buyers are perceived to be driven more by “fear”, and “buyer panic” is perceived to be rising mildly. He also points out that a lower first- time buyer percentage suggests that this group of buyers have "mounting growth limits". 

"Economic conditions are gradually turning against residential property, after three consecutive years of economic growth decline, what appears to be a disappointingly bad start to 2015, and the likelihood that the next interest rate move will be up." 

In such conditions, Loos says it is important home buying happens for the “right reasons”, and that buyer panic doesn’t begin to trump healthy confidence. "The risk is that some increasingly financially-constrained households try even harder to get into the property market as opposed to opting for the rental option, a function of South Africa’s sometimes unhealthy obsession with homeownership." 

Loos says a further hint that residential affordability is perhaps just starting to become a constraint, emanates from another survey question regarding the percentage of total buyers that are single, versus those buying as couples. "In times of relative in-affordability, one expects to see the couples buyers becoming a bigger percentage of total buying, as they can pool their incomes to buy property, and thereby address the affordability problem better than single buyers." 

At a stage of 2010, the percentage of buyers estimated to be couples peaked at 87% of total buying, says Loos. "Thereafter, in lagged response to sharp interest rate cuts from 2009, the couples percentage declined each year to around 80% in 2012 and again in 2014, translating into a rise in the single buyer percentage." 

The 1st quarter of 2015 survey, however, hints at an impact from housing affordability deterioration, with the couples buying percentage rising to 84%, from the previous quarter’s 81%, says Loos.  

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