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SA property market: demand slows, stock levels improve

18 Jan 2016

There are signs that activity levels in the South African residential property market are slowing somewhat, although the position remains “well-balanced” with more would-be buyers visiting show houses in the 4th quarter of 2015. 

The estimated average time of properties on the market did rise slightly, from a previous quarter’s 11 weeks and 1 day, to 12 weeks and 1 day in the 4th quarter of 2015, according to the survey, “having hovered not far from the 12-week level since back in 2014”. Around 12 weeks average time on the market “still reflects a good market balance”.

Estate agents pointed to a decline in activity levels for the 3rd successive quarter, and the 4th consecutive quarter on a seasonally-adjusted basis, according to the FNB Estate Agent Home Buying Survey for the 4th quarter of 2015. 

This slowing may reflect the impact of “anaemic” economic growth in South Africa, which was just above 1% year-on-year as at the 3rd quarter of 2015, as well as gradual interest rate hiking by the SARB (South African Reserve Bank), says John Loos, household and property sector strategist at FNB Home Loans. 

The survey shows, on a scale of 1 to 10, the 4th Quarter Residential Activity Indicator declined to 6.02 from the previous quarter’s 6.14. Taking seasonal factors out of the equation, the indicator pointed to a decline from 6.19 in the previous quarter to 6.13 in the 4th quarter of 2015, and there is now a noticeable decline evident from the 1st quarter 2015 high of 6.73. 

“On a year-on-year percentage change basis, the 4th quarter saw a significant decline in the Residential Activity Rating for the 2nd consecutive quarter,” says Loos. “This year-on-year rate of decline measured -8.93%, weaker than the prior quarter’s -7.4%, and significantly weaker than the +12.18% growth high reached in the 3rd quarter of 2014.” 

Estate agents asked to estimate the average number of “serious viewers” per show house, indicated an improvement on the prior quarter’s 9.31 to 11.29 in the 4th quarter. 

However, the survey notes summer seasonal factors may have played a role in this quarter-to-quarter rise. “More significant perhaps, is that this average is below the corresponding quarter of 2014, which recorded an average of 12.9.” 

In addition, the 4-quarter moving average number of viewers per show house continued to decline throughout 2015, says Loos. “We believe, therefore, that the broader declining trend in the average number of viewers remains intact, seasonal factors aside.” 

Simultaneously, the survey points to three consecutive quarters of decline in the percentage of agents citing stock constraints as an issue, which starts to suggest that supply constraints may be becoming less acute, he says. “From a high of 24% of agents citing the existence of ‘stock constraints’ being an issue for them in the 1st quarter 2015 survey, this percentage has declined for three consecutive quarters to 13.4% by the 4th quarter 2015 survey.” 

Besides some possible demand weakening, “stock”, or “supply” constraints, may also be being alleviated by indications of moderately positive growth in the reported number of new residential units completed through much of 2015, he says. 

There are a number economic reasons why demand would be weakening, says Loos. Notably the “ongoing gradual interest rate hiking” and an “economy having experienced a broad growth slowdown over the past 4 years, recording a poor 1% year-on-year growth rate as at the 3rd quarter of 2015”, hampering job creation and the pace of Household Sector Disposable Income growth. 

“In addition, agents may be implicitly explaining part of the reason when they answer the question related to home affordability,” he says. “Whilst they don’t perceive affordability levels to have deteriorated too much yet, their affordability perceptions were on average mildly worse in 2015 compared with 2014.” 

Loos notes that despite the indications of demand and activity weakening, to date the impact on the market balance doesn’t appear to have been severe, if one looks at potential indicators of the balance between supply and demand or of “price realism”. 

The estimated average time of properties on the market did rise slightly, from a previous quarter’s 11 weeks and 1 day, to 12 weeks and 1 day in the 4th quarter of 2015, according to the survey, “having hovered not far from the 12-week level since back in 2014”. Around 12 weeks average time on the market “still reflects a good market balance”. 

Examining indicators of price realism, there was only a small deterioration in 2015 compared with 2014, explains Loos. “In the 4th quarter survey, agents reported an unchanged percentage of sellers having to drop their asking price, to the tune of 87%. 

“However, this level is now noticeably higher than the 78% ‘relative low’ recorded in the 2nd quarter of 2014. The estimated average percentage asking price drop, on those properties where a price drop is required to make the sale, was -9%, unchanged on the prior quarter but slightly more than the -8% of 2014 and early-2015.” 

However, the survey points to a “noticeable improvement in agents’ expectations of near-term activity levels, despite the recent activity decline". “The clear reasons for this are not apparent, given agent perceptions that economic stress/pessimism is more widespread than positive consumer sentiment.” 

In addition, Loos says the agents expect less in terms of house price growth compared to prior expectations. “We suspect, therefore, that the widespread expectation of a rise in near-term activity may be more supply-related than demand-related, given some apparent alleviation of stock constraints in the market, while also possibly being a function of a low activity base having been created by the noticeable decline in the Activity rating through 2015.”

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