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Slowing 1st time buyer activity impacting dominance of ST market

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Sectional Title homes have seen a long term rise in prominence in South Africa’s property trade, driven by a rise in urban living and the demand for a convenient, modern lock-up-and-go lifestyle close to employment and other economic opportunity.

This segment is especially popular among younger, first time buyers, who as stated in FNB’s latest Property Barometer, are more credit dependent and therefore more sensitive to interest rate changes. The result is that regardless of the long-term structural changes, the ST market is not exempt from short-term cyclical fluctuations.

According to FNB ST transaction volumes have risen to 29.94% of total property transactions by individuals by Q3 2016, from a cyclical low of 23.58% in Q3 2010. This surge is believed to be partly driven by the post-recession recovery in first time buying levels from around 2010/11; first time buyers are believed to be a significant source of demand for smaller-sized ST homes especially.

John Loos, FNB’s household and property sector strategist, said that the typical dependence on debt of the younger first time buyer, and rising interest rates since early-2014 has meant that the ST market has experienced a cooling off period in recent times.

First time buyers are less confident

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“The first time buyer percentage has fallen back from an early-2014 high of 28% of total home buying, to 18% by Q3 2016,” said Loos. “This in turn, may be cooling ST demand just a bit more than that of full title.”

Even though the FNB Valuers’ Market Strenght Index (MSI) for ST property is still stronger than that of full title property (52.37 as opposed to a level of 50.04 for full title) the MSI for ST has experienced a more significant slowing in year-on-year growth compared to the MSI for full title.

This is believed to be as a result of the fact that the ST market segment is typically more cyclical than the full title market. “In tougher economic and interest rate times it can weaken a bit more significantly than the full title market,” explained Loos.

He added that, although certain key performance indicators still suggest that the ST market is mildly stronger than the full title segment, this is likely to change as first-time buyers become increasingly stretched.

“First time and younger age group buyer demand is more important to the ST market than to the full title segment,” concluded Loos. “This group is seeing a decline in significance in the market lo late, we therefore do not believe that the ST segment will remain stronger than the full title market for too much longer.”

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