FNB residential property barometer still points to a household sector under severe stress
The second quarter results of the FNB Residential Property Barometer survey show a stuttering in the recent trend in demand activity levels, with estate agents surveyed reporting an almost insignificant decline in demand activity from 4.8 in the previous quarter to 4.79 (scale of 1 to 10).
However, seasonal factors may be largely responsible for this, and if one compares the second quarter’s activity level with the corresponding quarter a year ago, it has risen by +8.4%, the first year-on-year rise since the 1st quarter of 2007. This suggests, seasonal factors excluded, the mild recovery in residential demand, which started late last year, continues.
John Loos, Strategist at FNB Home Loans says, “At the current stage, however, we would warn against getting too excited. A 4.79 level on a scale of 1 to 10 remains on the weak side, and although estate agents surveyed believe that interest rate cuts have done some good, they still think that the ongoing strict banks’ lending criteria, especially when it comes to widespread deposit requirements on new loans, are a major constraint on demand. In addition, estate agents believe that financial stress selling may have worsened in the second quarter, helping to sustain an oversupply of property on the market. When asked to give reasons why sellers are selling property, the survey group estimated that about 34% of sellers are selling in order to downgrade due to financial pressure. The situation appears particularly bad on the lower income end, where this estimated percentage rises to 41% of total sellers.
Loos believes, therefore, that an ongoing imbalance between demand and supply will continue for some time, translating into some further house price deflation in the second half of the year.
“Indeed, data from the Property Barometer appears to support this view, with estate agents surveyed estimating that of all investment properties returned to the market, 36% had been sold for lower than their previous purchase price. This percentage is sharply up from the 13% of the previous quarter, adds Loos.
Two other Barometer questions’ results both support the notion of an oversupply on the market, as well as pointing to continued unrealistic expectations on the part of sellers. The average time that a property spends on the market prior to sale increased to a new record high of 21 weeks and one day, while an unchanged 86% of sellers were required to drop their asking price in order to make the sale. These unrealistic demands are probably playing a major role in curbing volumes of transactions, with 66% of agents still maintaining that income levels are far behind house price levels (slightly down from a previous of 68%).
On a more positive note, however, Loos says that emigration selling looks to be contributing far less to the oversupply of property on the market in recent times, compared to last year. In the second quarter, an estimated 8% of sellers were selling in order to emigrate, which is significantly down from the 20% peak reached in the third quarter of last year. Loos continues to say this was anticipated, as emigration surges that typically follow major political changes (and perceived uncertainty that comes with such change), such as those that took place in Polokwane during 2007, normally subside over time.
In addition, job prospects in popular emigration destinations look less rosy at present. Loos says that he suspects that what he calls the negative “net foreign effect” on property may be subsiding at present. By this he refers to the net flow of those leaving for foreign shores versus those returning to the domestic property market. He says that “while we appear to have seen a significant decline in emigration selling, there’s little evidence of major change in terms of people from abroad buying property locally. Foreign citizen buying of property may have dropped off a little, with 16% of estate agents claiming less foreign buying versus only 4% claiming more foreign buying. However, against this there is a slight hint that expat buying has risen insignificantly in importance, with 16% of estate agents claiming more expat buying versus 9% claiming less.
In a nutshell, the FNB Residential Property Barometer reflects a mildly improving demand situation (seasonal factors aside), but unfortunately a supply situation that reflects widespread financial pressure. Loos says that, although FNB is starting to experience improvement in its arrears situation, and so it should with interest rates having declined significantly, the levels of bad debt remain high. In addition, SARB economic data indicates that the household sector has had little success in reducing its debt-to-disposable income ratio from historic highs reached early last year due to household disposable income growth having declined faster than credit growth in recent quarters. In real terms, the SARB reports negative real disposable income growth since the middle of 2008 and this in turn is a reflection of a very weak global and domestic economy. In recent months, early encouragement has been provided by the SARB Leading Business Cycle Indicator starting to level out, but Loos believes that it will be a long slow road back from what has been the biggest global crisis in many decades.
”The lower income end of the market appears worse hit financially, and this raises concerns over the performance of the so-called “affordable segment” of the market in the near term”, concludes Loos.
