The 1ST Quarter 2015 FNB Estate Agent Survey once again returned a strong estimate of 1st time buying levels expressed as a percentage of total home buying, but a little down off the peak percentage of a few quarters ago. We believe that the mild decline may just point to rising challenges regarding home affordability of late.
According to the sample of agents surveyed, 1st time buyers were estimated to be 25% of total home buyers. This is mildly lower than the 28% high of the 2nd quarter of 2014, and the percentage has now been lower than last year’s high point for 3 consecutive quarters, causing the smoothed trend line to point slightly downward.
While the 1st time buyer percentage still remains high by the standards of years prior to 2014, the mild decline in recent quarters may just be pointing to gradually mounting home affordability pressures.
Both of our FNB Home Affordability measures, namely, the Average House Price/Average Labour Remuneration Ratio, as well as the 100% Installment on an Average Home Loan/Average Labour Remuneration Ratio, started to rise in 2014 after prior years of decline, the net result of house price inflation exceeding wage growth, and of course the minor interest rate hikes last year.
It would appear, too, that an increasing portion of 1st time buyers are indeed concerned about house price increases and affordability challenges, as indicated in the “Buyer Panic”-related survey question.
“Buyer Panic” refers to a state of mind where aspirant 1st time residential market entrants begin to fear that if they don’t buy a home quickly, the price levels will rise to levels where property becomes unaffordable for them. When such panic sets in, it can cause “inappropriately high” levels of 1st time buying, with a portion of 1st time buyers over-extending themselves financially as they attempt to get a foot in the property market “before it is too late”. This, in turn, can cause market price “overshoots” or sometimes what economists describe as “price bubbles”. While the market still appears far from “crazy”, buyer panic must always be a concern where it exists.
We have only started the question regarding buyer panic in our Estate Agent Survey recently, so we don’t have a long history to analyse. However, in the 6 quarterly surveys that the question has run, the agents surveyed consistently perceive a significant percentage of 1st time buyers that are driven by panic, or “fear that if they don’t buy now it will become too costly for them to afford later”.
The 1st quarter survey estimate stood at 38% of total 1st time buyers, up from the previous quarter and further elevated from the 30% of a year ago.
So, while confidence would still appear to be a key driver in what are still high 1st time buyers levels, over one third of 1st time buyers are perceived to be driven more by “fear”, and this “buyer panic” is perceived to be rising mildly. And, of course a lower 1st time buyer percentage suggests that this group of buyers’ have mounting growth limits.
Economic conditions are gradually turning against residential property, after 3 consecutive years of economic growth decline, what appears to be a disappointingly bad start to 2015, and the likelihood that the next interest rate move will be up .
In such conditions, it is important that home buying happens for the “right reasons”, and that buyer panic doesn’t begin to trump healthy confidence. However, the risk is that some increasingly financially-constrained households try even harder to get into the property market as opposed to opting for the rental option, a function of South Africa’s sometimes unhealthy obsession with home ownership.
A further hint that residential affordability is perhaps just starting to become a constraint, emanates from another survey question regarding the percentage of total buyers that are single, versus those buying as couples. In times of relative in-affordability, one expects to see the couples buyers becoming a bigger percentage of total buying, as they can pool their incomes to buy property, and thereby address the affordability problem better than single buyers.
Therefore, at a stage of 2010, the percentage of buyers estimated to be couples peaked at 87% of total buying. Thereafter, in lagged response to sharp interest rate cuts from 2009, the couples percentage declined each year to around 80% in 2012 and again in 2014, translating into a rise in the single buyer percentage.
The 1st quarter of 2015 survey, however, hints at an impact from housing affordability deterioration, with the couples buying percentage rising to 84%, from the previous quarter’s 81%
In short, last year, we began to point to the start of a residential affordability deterioration, as reflected in our 2 FNB Affordability Indices, following prior years of huge affordability improvement.
While the 1st time buyer percentage still remains high, it is off its peak of 3 quarters ago, which may be reflective of such mounting affordability constraints.
In addition, the survey respondents now perceive higher levels of “buyer panic”, or concern, amongst 1st time buyers regarding house price inflation.
Provided “buyer panic” does not become too extreme, and given the likelihood of ongoing domestic economic growth weakness, growth in 1st time buyer numbers looks set to be muted from here onward, which suggests that one potentially important driver of residential demand and thus house price growth may decline in significance in the near term.