A report from the real estate trenches
The easiest way to find out about the challenges in a particular industry is to talk to people at the proverbial front line. If you want to know how things are going in the financial services industry, then interview an independent financial adviser. If you want to find out how your favourite retail outlet is doing, spend some time with the cashiers… And if you want to know about the housing market, chat to a realtor. First National Bank applies this logic in their FNB Estate Agent Survey, conducted quarterly.
The survey is conducted among a sample of estate agents from South Africa’s six major metros, with a view to obtaining their perceptions of residential property market conditions. Why would you favour an estate agent’s view over a housing economist, for example? The answer is fairly simple: Because estate agents are among the first parties to a property transaction they get the “jump” on other stakeholders when it comes to succinct housing market changes.
Latest survey points to “no change” in overriding trends
This makes the Q3 2011 FNB Estate Agent Survey, conducted in August 2011, the perfect tool to pick up on any positive undercurrents in the domestic house price market. Unfortunately, despite a moderate improvement in residential demands and estate agent confidence, the survey points to “no change” for the period. John Loos, Property Market Strategist at FNB Home Loans says that estate agents rated residential demand at an average 5.86 (on a scale of one to 10) which falls at the higher end of their “stable” activity range… And that’s only marginally better than the 5.61 level recorded in the previous survey. The latest result, at best, points to a stabilisation in demand.
Loos wasted little time in spinning some positives from the report. He says this is the first time since the survey’s inception that Q3 demand “outpaced” Q2 demand… And he noted that this improvement occurred despite slower than expected economic growth and fears of a pending interest rate hike. The prime mortgage lending rate has been pegged at a record low 9% since November 2010 – and many economists believe the next hike is imminent.
Unpacking homeowner behaviour
The survey also provides insight into the factors that may influence homeowners to sell their properties. “Agents estimated a decline in the percentage of sellers selling their homes in order to downscale due to financial pressure, from 25% in Q2 2011 to just 19% today,” observes Loos. This trend, supported by the latest South African Reserve Bank data on household debt and debt service ratios, suggests that the long period of lower interest rates has assisted households in improving their financial position.
A clearer trend relates to the number of sellers selling in order to downscale due to “life stages”, a concept familiar to our financial adviser readership. “This refers mostly to those households whose children have grown up and left home, as well as to those who are ageing and for whom a large home may no longer be practical,” says Loos. The number of “life stages” sellers has increased from an estimated 14% at the beginning of 2008 to 23% in the latest survey… What is driving this trend? Aside from the aging population theory there are a number of commonsense considerations. The first is that this segment of the market held back through the tough 2008/9 years and is now selling into what is perceived to be a better market. Loos explains: “Such sellers, many of whom are in no hurry to sell, may bide their time until the market strengthens, and perhaps they are now coming out of the proverbial woodwork due to property times being a little better compared with 2008…”
We prefer the second “major contributor” flagged by the FNB property expert. The spiralling cost of home ownership – especially administered prices such as municipal rates and water & lights bills – is driving pensioners out of their pre-retirement residences at a greater rate than before. In other words, the impact of inflation-plus regulated price hikes on homeowners cannot be ignored! In August 2011 CPI stood at 5.3% versus CPI for Housing (6.8%)… The latter includes electricity (currently inflating at 17.2%) and water and other services, rising at 9.2% per annum! Downsizing – for cost reasons – will probably place large house prices under pressure, while underpinning the so-called middle market.
Getting the price right...
Loos believes that the balancing mechanism between supply and demand, namely price, is still out of kilter with market realities. Homeowners still think they can hold out for their asking prices, with the result that houses now remain on the market an average 17 weeks and one day before being sold. The reality is that 91% of sellers are forced to drop their asking price, by an average 13%, before securing the sale!
What can we expect from the residential property market through 2012? “While agents point to a slightly better residential demand, they don’t indicate an improvement in the balance of demand relative to supply, which would suggest that house price growth is set to remain under pressure for now,” concludes Loos.
Editor’s thoughts: A while back I wrote an article on behavioural finance – and how our perceptions and beliefs impact on our financial decisions. These perceptions affect home buyers and sellers equally… For example, a person who holds out for R50, 000 more on a R2 million property transaction is actually going backwards if by doing so he delays the sale by 20 weeks! Do you think we pay enough attention to the time value of money when concluding big ticket transactions? Please add your comment below, or send it to [email protected]
