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Buy-to-let market remains stable

buytolet market resize

According to the 1st Quarter 2016 FNB Estate Agent Survey, the buy-to-let market remains stable. This is the first of FNB’s quarterly series of Property Barometer reports pertaining to the survey, in summary form, by FNB Home Loans household and property sector strategist John Loos.

The picture continues to be one of moderate buy-to-let activity levels, but at the same time limited selling of rental/investment properties.

At the current time of economic weakness and high real home values, by South Africa’s historic standards, such a stable and “ordinary” situation is probably to be expected, and is in many ways healthy.

Buy-to-let buying percentage moves sideways

The 1st quarter 2016 FNB Estate Agent Survey once again pointed to little “excitement or exuberance” in the level of buy-to-let home buying, which is not necessarily a bad thing at the present time.

As a percentage of total home buying, buy-to-let purchases are estimated by survey respondents to have moved sideways, remaining unchanged on the previous quarter at 9% in the 1st quarter of 2016.

This 9% estimate has been recorded in 6 of the past 7 quarters, an indication of what is meant when we refer to “stability”.

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. Admittedly, it is difficult to ascertain what would be a “normal” percentage in weak economic times such as the current ones, because we do not have a survey history dating back to previous ‘super-cycle’ periods of economic weakness before last decade’s boom period.

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.

SA housing resizeOne 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 2014 too, also reducing buy-to-let attractiveness mildly in recent years. 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 5.17% (Next CPI rental survey due in the March 2016 CPI release). But this rental inflation has not yet overtaken average house price inflation, so as at the 4th quarter of last year we still estimated the average yield on residential property to be on its declining trend.

From a peak of 8.78% at the end of 2013, our revised National Average Gross Yield has declined to 8.48% by the final quarter of 2015, compressed by a period of relative home buying market strength in recent years, 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 February 2016 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

sa housing2 resizeWhile investment property buying levels are seen as “moderate”, the level of selling of such properties is also perceived “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 4 quarters up to the 1st quarter of 2016 to be 3.25%%, unchanged from the prior quarter. This percentage remains relatively low, having been as high as 10.25% at a stage of 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 small positive growth in the ownership of investment properties, as suggested by our deeds data estimated of the number of secondary properties in existence.

Perhaps surprisingly, agents’ buy-to-let expectations are slightly more optimistic

Interesting in the 1st quarter survey, is that the agents surveyed appear to have slightly more optimistic 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 1st Quarter 2016 survey came out at a slightly higher level than the prior few quarters, at 0.1 (scale of 1 to -1).


The picture that continues to emanate for the Buy-to-Let Residential is one of “stability”, which includes moderate buying levels and moderate selling levels. We believe that in the current time of economic weakness, a lack of “exuberance” in this market is probably a positive thing. Important to realize is that this segment of the Home Buying Market is more cyclical than the more essential Primary Residence Buying.

Therefore, a “lack” of Buy-to-Let buying, can limit the “downside risks” to the residential market, and thus stabilize it, when the economy is on a deteriorating path, because this form of residential demand can weaken more sharply when economic downturns occur.


Review overview