FNB Residential Property Barometer reports further increase in activity levels

The first quarter FNB Residential Property Barometer pointed to further signs of a mild improvement in demand activity levels, but other areas of the survey results still pointed toward a rather unconvincing pictures.

The Property Barometer is a survey of a sample of estate agents in the major cities of the country regarding their personal experience with market conditions. The main Barometer questions relates to the level of demand activity, and agents are asked to rate the level of demand that they experience on a scale of 1 to 10.

After an initial rise from a historic low of 4.1 in the third quarter to a 4.6 in the final quarter of 2008, a further mild increase was experiences to a level of 4.8 in the first quarter of 2009. The first quarter survey was undertaken in mid-February, shortly after the Reserve Bank’s announcement of a further 1 percentage point interest rate cut.

Improvement in activity is more than just about seasonal factors

One needs to be cautions in viewing the data, as seasonal factors can play a role from time to time. One manner of eliminating seasonal factors is to calculate the year-on-year percentage change in activity levels, thereby comparing the rate of change in activity with the same quarter year before.

While activity was still in year-on-year decline in the first quarter, there was a sharp reduction in this rate of decline, from -21% in the third quarter of last year, to -3.2% in the first quarter of 2009. This indicates that the recent quarterly improvements in activity were genuine market improvements and not just seasonal factors.

Agents indicate that there are still stumbling blocks

When surveyed, 41% of agents expected further strengthening in demand in the following quarter, implying that positive expectations are not yet embedded in the majority of the respondents. Interest rates were still the single-most important driver of future expectations, with 33% of the respondents positive about interest rate cuts, 6% still “wary” and 3% said rate were still problematically high. However, 31% of respondents said that banks’ lending criteria was still too strict and deposit requirements too onerous – this was seen as negative. Third in significance was the “air of general pessimism”, cited by 19% of respondents as a problem. Here they refer to the global and local economic downturn and accompanying job loss. 13% of respondents still suggest that sellers’ prices are out of reach for many, despite some improvements in sellers’ realism.

First time and buy-to-let buying still weak

Two of the more cyclical components of demand, namely first time and buy-to-let remained depressed. After an up-tick in the first quarter of 2008, estimated first time buying as a percentage of total buying dropped back from 17% to 15% in the first quarter of 2009, while the buy-to-let portion declined from 12% to 11% over the same period.

Sellers having to drop their price and average time on the market

After an improvement in the fourth quarter of 2008, both the percentage of properties sold for less than asking process and the average time on the market deteriorated, once more in the first quarter of 2009.03.23

From 81%, the percentage of properties sold at less than asking price rose to 86% in the first quarter, suggesting many sellers are still not yet realistic in their pricing. In addition, the number of weeks and days that the average house in on the market prior to sale rose from 15 weeks and 3 days to 17 weeks and 4 days from quarter to quarter.

Reason for selling

One the selling side, downscaling due to financial pressure is still cited as by far the single-most important reason for selling properties. While remaining high, it is mildly encouraging that downscaling due to financial pressure as a percentage of total selling remained unchanged for the second consecutive quarter at 26%. By comparison, selling in order to upgrade still remained in the doldrums at 7%.

An area of encouragement on the selling side is the further decline in the significance of selling in order to emigrate, from a peak of 20% of total selling in the third quarter or 2008 to 11% in the first quarter of 2009. This is believed to be partly due to minority groups perhaps coming to terms with the post-Polokwane political changes in the country. But it also probably has much to do with a very weak global economic situation, making job prospects in many of the popular emigration destinations poor.

Interpretation and outlook

Despite the second consecutive quarter of rise in activity levels, when the Barometer survey results are examined as a whole, the residential market does not appear to be out of the woods yet – either in terms of value or volumes.

We are currently experiencing an extremely weak global economic situation, with weak global demand for SA’s exports having a major impact on the country’s export-driven sectors and thus on overall economic growth. Retrenchments are thus commonplace as the country heads into recession.

Admittedly, this weak global situation has caused commodity prices to fall and started to bring our own inflations rate down as a results, which in turn has led to SARB to star reducing interest rates, and t is expected that prime rate could fall to around 11% by mid-year.

But against, the positive falling inflation and interest rates, it can be expected that household sector as well as bank’s sentiment will be dampened by fears of job loos and resultant disruptions to income streams. One should thus not expect residential demand to skyrocket as it did in 2003/2004 as interest rates fell rapidly, because 2003 rate cuts were accompanied by a very positive economic growth and employment situation at the time. One should also not expect credit criteria to ease dramatically any time soon either, although falling interest rates should automatically improve affordability somewhat.

Indeed, the above views appear to be reflected in the FNB Residential Property Barometer survey, where agents have seen interest rate cuts as a positive, but indicate that the banks’ credit criteria remain troublesome, and that negative sentiment due to a weak economic situation is also a key factor in moderating further expectations.