Segment analysis can be very useful in the search for mounting pressures in the residential market. One of FNB’s main themes in recent times has been “mounting consumer constraints”. The FNB Estate Agent Survey has pointed to this, with a declining trend in the level of “trading properties in order to upgrade to better ones”. Such a declining trend should impact more heavily on the higher end of the market, as “upward moving” demand slows. Such a trend is arguably a logical result of deteriorating residential affordability after some years of real house price inflation along with interest rate hiking and slowing disposable income growth. The apparent result has been weaker house price growth at the higher end.
UPPER INCOME AREA SEGMENT SHOWS THE MOST NOTICEABLE SLOWING
The FNB Area Value Band House Price Indices provide a picture of the relative performances across areas, grouped by average price levels of those areas, in the 6 major metros of South Africa (Tshwane, Joburg, Ekurhuleni, Ethekwini, Nelson Mandela Bay and Cape Town).
Of late, the relative performances seem to point to the high end of the market having slowed the most noticeably, which in turn seems to be broadly in line with what the survey respondents in the FNB Estate Agent Survey have been telling us recently too. In that survey, what agents term the “High Net Worth” Area Segment had shown the most noticeable softening in reported activity levels for some time, so it would not be surprising to have witnessed the most noticeable softening in average house price growth on the high end of the market too.
Using Deeds data transactions by individuals, we compile our 4 FNB House Price Indices by Major Metro Area Value Band, namely Upper Income Areas (Average house price = R2.813m), Middle Income Areas (Average Price=R1.480m), Lower Middle Income Areas (Average Price = R911,598) and Low Income Areas (Average Price = R482,918).
On a year-on-year basis, FNB sees that the Upper Income Area Segment’s average house price growth has slowed from a revised 11.9% back in the 4th quarter of 2014 to 3.2% by the 1st quarter of 2016. Through 2013 to mid-2015, this segment had the highest price growth of all 4 segments. But, more recently, from the highest base, this segment has shown the most noticeable slowing in growth through 2015 to date, and is now the slowest of the 4 Income Area Value Bands.
By comparison, the Middle Income Area Segment inflated by 4.6% year-on-year, having also followed the Upper Income Segment’s price growth direction slower.
There does, however, appear to have been some “relative strength” build-up late in 2014 in the Lower-Middle and Low Income Areas. On a year-on-year basis, the Lower-Middle Income Segment’s price inflation rate accelerated mildly from a 4.9% low as at the 3rd quarter of 2015 to 5.4% by the 1st quarter of 2016.
The Low Income Area Segment saw its year-on-year price inflation accelerate more noticeably, from 4.3% in the 3rd quarter of 2015 to 6% in the 1st quarter of 2016.
Therefore, recent area value band house price data has pointed to relative weakness at the higher income/price end of the residential market.
These relative performances of segments are believed to be evidence of mounting financial constraints within the Household Sector, along with weak Consumer Confidence levels. Real Household Disposable Income growth has been slowed in recent years by a multi-year economic growth stagnation, while interest rates have pushed up slowly. In addition, effective income tax rates on households have been gradually raised in recent years, while municipal rates and tariffs have inflated far in excess of average consumer inflation, dramatically raising the running costs of a home. Then, of course, there is the sliding scale for transfer duty, rising to 11% when property values go above R2.25 million and 13% above R10m.
All of these factors should drive a search for relative affordability in the market, favouring the lower priced end, relatively speaking.