After the High Net Worth Area segment led the slowing in Residential Activity, weakening spread into Upper and Middle Income Areas through 2015. The Lower Income Area segment remains the strong point reports FNB Home Loans household and property sector strategist John Loos in the latest edition of the Property Barometer.
ACTIVITY APPEARED STRONGEST IN THE LOWER INCOME SEGMENT OVER THE PAST FOUR QUARTERS.
For the four quarters up to and including the fourth quarter of 2015, the sample of FNB Estate Agent Survey respondents from the Lower Income Area Segment of the residential market returned the highest estimated activity rating for their areas. The High Net Worth Area segment remained the segment with the weakest Activity Rating last year, but through 2015 that weakening activity spread to the Upper and Middle Income Area segments.
The FNB Estate Agent Survey is of a sample of estate agents predominantly in SA’s major metro regions. The first question asked to agents is with regard to their perceptions of residential activity in their areas, a subjective question on a scale of 1 to 10, with 10 being the strongest level of activity.
The four Income segments are self-defined by agents working the areas, and comprise the High Net Worth segment (average price = R5.32m), the Upper Income segment (average price = R2.8m), the Middle Income segment (average price = R1.39m), and the Lower Income segment (average price = R872,500).
Examining average agent activity ratings by segment for the four quarters up to and including the fourth quarter of 2015, the High Net Worth Segment recorded the lowest average rating of 5.81 over the four quarters. However, after noticeable decline through much of 2014 and 2015, this segment’s Activity rating appeared to stabilise, whereas the Upper and Middle Income Area Activity ratings weakened noticeably.
These two Activity ratings remained higher than the High Net Worth Area Rating, at 6.23 and 6.4 respectively on a 4-quarter moving average basis, but had declined noticeably as 2015 progressed.
The strong segment of the market, from an Activity level point of view remained the Lower Income Area segment, with an average Activity rating of 6.88.
INDICATORS OF SELLER PRICE REALISM OR SUPPLY-DEMAND BALANCE POINTED TO THE HIGH NET WORTH SEGMENT BEING THE WEAKEST
When we ask agents for their expectations of near term activity levels, we follow up with an open ended question as to the reasons why they expect whatever they expect.
In recent years, “stock constraints” have been a key issue for a sizeable portion of estate agents. Segmenting the percentage of survey respondents citing stock constraints as an issue in their lives, we see that in 2015 these constraints appeared to become more acute as one went from the high end to the low end of the residential market.
On this count, too, therefore, the Lower Income Area segment came out as the strongest segment from a demand-supply balance it would seem.
The Lower Income segment saw its average time of homes on the market declined further, too, in 2015, averaging a lowly eight weeks for the four quarters up to the final quarter of 2015. At the other end of the spectrum, we saw the High Net Worth segment’s 19 weeks and 2 days average flattening out after a strong prior rise in this average time on the market.
A SHIFT TOWARDS A MORE “BACK TO BASICS” APPROACH CURBS UPGRADING ACROSS ALL INCOME AREA SEGMENTS
- A slower pace of upgrading
A noticeable feature of recent FNB Estate Agent Surveys by segment has been a broad decline in the percentage of sellers believed to be selling in order to upgrade to a better home. Such decline has taken place across all four of the area segments, although being most pronounced at the High Net Worth Area end to date.
By the fourth quarter of 2015, the 4-quarter moving average percentage of sellers believed to be selling in order to upgrade, for the Lower Income Areas, had declined mildly to 23%, from 25% as at the final quarter of 2014. By comparison, the Middle Income (15%) had just started to show signs of decline, while the Upper Income (15%) and High Net Worth (13%) Income Area segments were also down off their 2014 highs.
Therefore, the higher end areas may be starting to receive less of a boost from upgrading out of the Lower and Middle Income Segments of late.
- And an ongoing rapid pace of downscaling by “ageing” households
In addition to a slower pace of upgrading to higher valued properties, the survey also points to a higher rate of selling in order to downscale due to “life stage” in 2015, which refers to sellers who no longer have the need for a “large or costly” home due to children having left home, or because they are ageing and the running of a large home becomes “a costly hassle”.
For the market as a whole, this reason for selling is believed to be the single-biggest one, and is more pronounced at the higher end of the market, with the High Net Worth Area Segment estimated to have had 30% of total sellers selling for this reason over the past four quarters, compared with 28% in the Upper Income Segment. By comparison, Middle Income Areas had an estimated percentage of 26%, and Lower Income areas a significantly lower 17%.
The broad picture emanating from the FNB Estate Agent Survey by segment is one of relative weakness on the High End, notably the High Net Worth Segment, while the previously strong Middle Income Area segment also seems to have been showing signs of weakening through 2015. The Lower Income Area Segment has been the relatively strong part of the market.
The driver of relative higher end weakness is a “back to basics” approach by a rising percentage of households, it would appear, reflected in a slowing in the pace of upgrading to better properties, along with a rise in the pace of downscaling due to “life stage”. While the high rate of downscaling due to life stage is not theoretically driven by financial stress, it is highly possible that the rising costs associated with homes has been encouraging ageing households to “speed up” their rate of downscaling.
The myriad of steadily rising costs associated with owning and running a home are increasingly challenging. They include the higher 11% property transfer duty bracket kicking in at a property value R2.25m and above; A stagnation to noticeably weaker Economic and Household Sector Disposable Income growth in recent years; Rising interest rates; and Steadily rising municipal rates and tariffs.
These cost increases play into the hands of the cheaper and smaller-sized segments of the market. This is expected to see the Lower Income Area segment remain relatively stronger than the higher segments in the near term. However, this is not to say that this segment won’t also weaken. To the contrary, it can’t defy economic gravity indefinitely, and the economy remains on a deteriorating path.