Property Barometer – House Price Trends by Segment – Small Sectional Title Outperforms

In a financially constrained environment, translating into a focus on home affordability, it was probably to be expected that the Sectional Title Market’s price growth would mildly outpace that of Full Title in recent times.

The past few years have been characterized by solid levels of 1st time home buying. This, along with the constrained nature of Household Sector finance, translates into a search for relative affordability in the housing market. Therefore, it is perhaps to be expected that the smaller sized home market segment has performed a little stronger than the more costly-to-run large-sized homes. In turn, this should translate into a stronger performance in the Sectional Title Market, and indeed this appears to have been the case.

In the 4th quarter of 2015, the FNB Sectional Title House Price Index rose by 7.7% year-on-year, compared to the Full Title House Price Index’s 6.4%. This was the 8th consecutive quarter that the Sectional Title Index had shown mildly stronger growth than that of the Full Title Index.

Since the start of the post-recession house price recovery in the 3rd quarter of 2009, the cumulative growth of the Full Title House Price Index has still been slightly more than that of the Sectional Title Index, to the tune of 40.9%, versus 38.6% for Sectional Title, so the Sectional Title Index has lagged slightly during the recovery years. But since the beginning of 2001, just after the indices started, the Sectional Title Index has outpaced the Full Title Segment, growing cumulatively by 340%, compared to the 290.3% of the Full Title Index.

Therefore, whereas the percentage difference between the average Full Title house price and that of Sectional Title was near 40% early in 2001, at the end of 2015 it was 23.9%. Sectional Title values have thus gained noticeably on the Full Title average over the past decade and a half.

FNB’s valuers back this up with their own collective view of market strength, as captured in the Full and Sectional Title Market Strength Indices (MSI) (see note on page 4 for explanation). Here, as a group they have consistently perceived the Sectional Title Market to be stronger over the past 2 years or so, thus returning a higher MSI reading for the Sectional Title Market.

Within the Sectional Title Market, it is the smallest sized category, namely the “Less than 2 Bedrooms” category, which has shown the strongest price inflation and MSI of all 3 of the Room categories of late,, rising by a very solid 16.5% year-on-year in the final quarter of 2015.

By comparison, the “2 Bedroom Sectional Title” segment inflated by 7.2%, and the “3 Bedroom and More” segment by 6.6%.

The top performing sub-segment within Full Title was also the smallest sized “2 Bedrooms and Less” segment, with 6.9% year-on-year average price inflation, followed by the “3 Bedroom” segment with 6.6% inflation, and the largest “4 Bedrooms and More” segment only rising by 4%.

Therefore- be it Sectional or Full Title, the theme remains the same it seems, i.e. “smaller performs better”.

These relative performances of the sub-segments reflect the combination of a still strong desire of aspirant 1st time buyers to get onto the property ladder in recent years, coupled with a financially constrained Household Sector in a stagnating economic environment. Households are constrained by the combination of slow employment and income growth, along with high levels of indebtedness.

On top of this, home-related costs, especially Municipal rates and Utilities Tariffs (Eskom most notably), have been rising significantly faster than overall Consumer Price Inflation. Electricity and water costs can be contained by owning a “smaller” home with less luxuries, as well as containing maintenance and general running costs. Insurance and security costs are 2 such key costs.

Finally there is the issue of increasing land scarcity in major urban areas.

Sectional Title properties have the ability to better address both affordability and running cost issues, on top of often utilizing scarce land more effectively than the Full Title category.

Read more here: FNB Property Barometer_House_Prices_by_Segment_26_Jan_2016