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Buy-to-let market moves sideways

Estate agents paint a mediocre buy-to-let picture, but that may not be all bad in current times of economic downturn reports John Loos, FNB Home Loans household and property sector strategist.

If one is looking for big excitement, the buy-to-let residential market is probably not the place to look for it at present. Estate agents surveyed in the FNB Estate Agent Survey have for some time pointed to a relatively stable picture in buy-to-let activity levels, along with limited selling of buy-to-let properties.

Such a stable and “ordinary” situation is probably to be expected in an economic environment where interest rates creep up gradually, and the economy is stagnant, but where to date there have been no major shocks to the economy or the market.

Buy-to-let buying percentage rises, but not significantly

The fourth quarter 2015 FNB Estate Agent Survey once again pointed to no “fireworks” in the level of buy-to-let home buying.

As a percentage of total home buying, buy-to-let purchases are estimated by survey respondents to have risen very slightly, from a previous quarter’s 8%, to 9% in the fourth quarter of 2015. We regard the rise as insignificant, as the 9% level is the same as the 9% estimates for the three consecutive quarters prior to the 8% of the third quarter. So the buy-to-let percentage has more-or-less been trending sideways since 2014.

The recent estimates of buy-to-let levels remain moderate by comparison to last decade’s boom period, where they were estimated as high as around 25% of total home buying at a stage back in 2004.

Examining potential drivers of buy-to-let buying, it is realistic to expect the moderate levels to continue. Of course, buy-to-let buying along with leisure home buying is a non-essential purchase, and as such can be expected to be constrained in times of economic weakness and rising interest rates.

One of the big attractions of buy-to-let buying for many is the expected capital growth that can be achieved, but house price growth generally remains benign at present. For those more focused on the rental income stream, there has been some yield “compression” since 2012. The StatsSA CPI for Actual Rentals did see its inflation rate accelerate mildly in December 2015, from a previous rate of 4.94% year-on-year to 5.18%. But this rental inflation has not yet overtaken average house price inflation, so as at the third quarter of last year we still estimated the average yield on residential property to be on its declining trend.

From a peak of 9.92% at the end of 2011, the National Average Gross Yield has declined to 8.3% by the third quarter of 2015, compressed by a period of relative home buying market strength, contributing to a less attractive buy-to-let opportunity for those focused on yields.

We have created an additional measure with which to measure secondary property buying, using deeds data for transactions by individuals (“natural persons”). Here, we estimate the number of secondary properties owned by individuals (i.e. where someone owns more than one property) to be about 16.2% of all the properties identified. This ratio has flattened out in recent years, after a noticeable boom time rise during last decade.

Examining the growth rate in the number of these secondary properties, by November 2015 it was a moderate 3.3% year-on-year. This, too, is a far cry from a 26% growth rate in mid-2005. Important to understand is that secondary properties include those for purposes other than buy-to-let buying, including purchases for use by relatives or for leisure purposes. However, one would expect that holiday home buying, like buy-to-let buying, would probably also be at moderate levels in the currently weak economic times.

Selling of investment properties still perceived as low

While investment property buying levels are seen as “moderate”, the level of selling is also perceived as “moderate”.

We ask agents to estimate the portion of all properties sold that are believed to be investment properties being sold due to owners not earning the type of investment income that they had anticipated. For smoothing purposes, we use a 4-quarter moving average percentage, and find the average for the four quarters up to the final quarter of 2015 to be 3.2%%, down from the prior quarter. This percentage remains relatively low, having been as high as 10.25% at a stage in 2010.

In short, therefore, while buy-to-let buying levels are not seen to be setting the world alight at present, buy-to-let property selling appears even more modest. It is thus plausible that we are still seeing positive growth in the ownership of investment properties, as suggested by our deeds data estimated of the number of secondary properties in existence.

Agents moderate their buy-to-let expectations

Looking forward, the agents surveyed appear to be moderating their expectations regarding levels of buy-to-let home buying growth in the near term.

In our survey, we ask them to state whether they expect buy-to-let demand to increase (which gets a rating of +1), stay the same (rated as zero) or decline (rates as -1).

The FNB Buy-to-let Market Confidence Indicator is the weighted average of these different expectations, and the fourth quarter 2015 survey came out at a lower level than the previous two, at 0.07, down from the revised 0.086 as at the second quarter of last year. (scale of 1 to -1).

A potential benefit of relatively moderate levels of investment and second property buying is that it can reduce the cyclicality of a residential market, because such non-essential home buying is typically more volatile than home buying for more essential primary residence purposes. This can be useful in curbing the extent of market weakening in times such as the present, where we are steadily heading into an economic downturn.

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