Research

FNB estate agent survey suggests a further strengthening in levels of home maintenance and upgrades late in 2014

The FNB Estate Agent Survey points to the improving trend in the level of home maintenance and upgrades continuing, with the level of “value adding home upgrades” becoming more noticeable.

During the final 2 quarters of 2014, the FNB Estate Agent Surveys showed a further improvement in agent perceptions of home maintenance and upgrades, continuing a noticeable improving trend that dates back to late-2012.

We depict agent perceptions regarding levels of home maintenance, and we have 5 categories/levels of home maintenance and upgrades in the survey.

The “top” level is that of “Value Adding Home Upgrades”. From 2004 to around 2013, the survey respondents reported a long decline in the percentage of these homeowners “investing in their properties with a view to adding value”. This percentage reached a lowly 3% of total homeowners in the areas of these agents by the 1st half of 2013, well down on the 43% at the beginning of 2004. The recovery in the level of these costly value adding upgrades has understandably taken the longest to recover of the 5 categories, because the initial battle following the financial shock of the 2008/9 recession and interest rate peak was merely about getting standard home maintenance restored to full level in cases where this had been deferred.

More recently, however, the perceived level of value adding upgrades has started to recover noticeably. From a 10.5% figure for the 2 quarters up to the 1st quarter of last year, the percentage of homeowners estimated to be doing such value adding upgrades had risen to 15.5% by the 2 quarters up until and including the 4th quarter of 2014.

This is not yet near the boom time highs of a decade before, but is the highest estimated percentage for this category since the 4th quarter of 2008.

The next level “down” is the percentage of homeowners “fully maintaining their property and making some improvements”. This percentage declined mildly in 2014, not necessarily due to home owners shifting into lower levels of home investment but possibly due to a greater portion shifting up into the “Value Adding Upgrades” category. From 44.5% at the beginning of 2013, the percentage moved lower to 39.5% for the 4th quarter of 2014.

The next level down, namely the “percentage of owners not improving but still fully maintaining homes”, more-or-less treaded water, shifting slightly higher from 35.5% as at the 1st quarter of 2014 to 36% by the final quarter of last year.

Importantly, all of this translates into a 4th quarter decline in the category that one would want to see declining, i.e. the “percentage of homeowners attending to basic maintenance only”, which in effect means the home will “go backward” over time. This percentage decreased to 7.5% by the 4th quarter of this 2014, having started 2014 slightly higher at 9.5%.
Those owners allowing their homes to “get run down”, in the areas surveyed, remains relatively insignificant at 1%. 

Earlier last year, we had expressed concern that a deteriorating trend in the levels of home maintenance and upgrades may begin, as a result of the start of rising interest rates early in 2014. However, that appears to have been something of a “false start”, with the drop in global oil prices dramatically changing the inflation and interest rate outlook. Interest rates have been on hold since mid-2014, and look set to do so all through 2015. Therefore, under such a changed interest rate outlook, implying, too, an improved economic growth outlook, there appears no little reason why we can’t expect further improvement in home maintenance and investment levels in the near term.

The improvement in the 3 higher levels of maintenance and upgrades when added together are reflected in a further 4th Quarter strengthening in the FNB Home Investment Confidence Indicator.
This indicator is represented on a scale of -1 to +3. The indicator showed a broad gradual increase over much of the 2009 to 2013 period, to reach a level of +1.53 at the end of 2013. It then receded in the 1st 2 quarters of 2014, possibly a response to the “surprise” interest rate hikes along with a 1st quarter economic contraction, but a return to sideways movement in interest rates and improving economic growth appears to have set the index back on its rising path in the 2nd half of 2015.

Its 4th quarter level of 1.61 is the highest level since the 3rd quarter of 2007.

The increase in Home Maintenance levels continues to be seemingly reflected in the numbers for Retail sales for Hardware, Paint and Glass Product Retailers. While these retail growth numbers can fluctuate quite significantly, noticeable is that the significantly higher Home Investment Confidence Indicator levels through 2013 and 2014 have been accompanied by this category of retail sales showing real year-on-year growth well in excess of overall retail sales growth. Recently, for the 3 months up to November, Hardware, Paint and Glass Product Retail Sales measured 7.7% year-on-year in real terms, far in excess of overall real retail sales growth of 2.7%.

Finally, with regard to the reasons for why people undertaking home improvements are doing it, our agent survey still points to limited speculative building behavior, to the tune of 7% of total home improvements.
This remains low when compared to the 24.5% estimate back in early-2006. The overwhelming majority (77%) still do it for their own use, while 12% do it because they “can’t afford to buy elsewhere”.

CONCLUSION

The Home Maintenance and Upgrades market remains vastly improved from 2008/9 levels, and as at the 4th quarter of 2014 it appeared to be back on its strengthening path after a brief lull earlier in 2014.
While we had previously pointed to the possibility that the early-2014 start of interest rate hiking may lead to the end of the broad improving trend in home investment levels, the 2nd half of 2014 surveys suggested that such concerns were premature.

The consumer price inflation, economic and interest rate outlooks all began to improve significantly late last year as a result of the big global oil price decline and to a lesser extent the food price decline. Therefore, entering 2015 there appears little reason why we can’t see further improvement in Home Maintenance and Upgrade levels in the near term.

The improvement in the perceived levels of home maintenance, in turn, continues to impact positively on hardware retail sales growth, it would appear, with growth in this retail category proving very strong late last year.

The most noticeable recent improvement in home investment levels has been in the “percentage of homeowners doing Value Adding Upgrades to properties”, whereas the 2 levels below this, namely the “percentage of homeowners doing full home maintenance with some upgrades” and the “full maintenance only” categories had made their big improvements in years prior to 2014..
The net effect was that the FNB Home Investment Confidence Indicator rose further in the 4th quarter of 2014.

With Consumer Price Inflation now falling fast, and back below the 6% upper target limit, prospects for stable interest rates through 2015 are good. Given this, along with currently high levels of confidence in the residential property market, we expect further near term increase in the levels of home maintenance and fixed investment, coming mainly from the “Value Adding Upgrades” category.