House price performance by segment – Sectional Title showing signs of cooling

South Africa’s mounting urban land and infrastructure scarcity has been key not only in a “drive” towards smaller average sized properties, but also towards a more significant portion of Sectional Title homes, as we look to utilize land and infrastructure more economically.

In an attempt to measure the progress of the Sectional Title Segment’s growth, FNB uses deeds data transactions by individuals only (“Natural Persons”), which they believe should be a good proxy for residential transactions by individual households.

Here, FNB sees the number of Sectional Title transactions having increased in significance since 2010 after a 2008/8 recession dip.

Smoothing the data with a 6-month moving average, FNB sees Sectional Title transactions volume having risen to 29.9% of total property transactions by individuals by May 2016, from a cyclical low of 23.7% late in 2010.

The relative recovery in Sectional Title transaction volumes more or less co-incided with a post-recession recovery in 1st time buying levels from around 2010, with the more cyclical 1st time buyers believed to a significant source of demand for smaller-sized Sectional Title homes.

This period of relatively strong Sectional Title demand post-2010 contributed to the segment’s average house price inflation catching up with the Full Title average, and even marginally exceeding it through 2014 and 2015.

This, however, may have been changing in recent times. In the 2nd quarter of 2015, the FNB Sectional Title House Price Index saw a slightly slowing in year-on-year growth to 6.63%, from the previous quarter’s 7%. By comparison, the FNB Full Title House Price Index recorded slightly higher year-on-year increase of 7.38%.

The differences are not large, but off a higher base it has been the Sectional Title index’s price growth that has been slowing, and FNB believes that this has much to do with a recent slowing in the significance of 1st time buying in the housing market, which they believe should impact more significantly on Sectional Title.

According to the FNB Estate Agent Survey, 1st time buying has declined in significance in recent times, from an estimated high of 28% of total home buying as at the 2nd quarter of 2014 to 21% of total home buying by the 2nd quarter of 2016. While still a relatively good percentage, 1st time buyers are more credit-dependent and thus interest rate-sensitive that repeat home buyers on average, and they believe that rising interest rates since early-2014 have been key in cooling off 1st time buyer levels mildly.

This, in turn, may have cooled Sectional Title demand just a bit more than that of Full Title.

Within both the Full Title and Sectional Title segments, it is very clear that “smaller is better” when one compares the relative strength of the various sub-segments.

The smallest sized Sectional Title sub-segment, namely the “Less than 2 Bedroom” segment, still showed very strong double-digit price inflation to the tune of 13.7% in the 2nd quarter of 2016. Significantly behind was the 2 Bedroom sub-segment with 7.0% price growth, while the largest “3 Bedroom and More” category was the slowest sub-segment with 5.1% average price growth.

All 3 of these sub-segments showed slowing price growth.

In the Full Title segment, the same relative picture emerges. The smallest sub-segment, i.e. the “2 Bedrooms and Less” category, showed the strongest price inflation to the tune of 9.6% in the 1st quarter of 2016. This was followed by the 3 bedroom segment with 7.6%, while the largest “4 Bedroom and More” segment showed the slowest price growth of 4.1%.

Unlike the Sectional Title sub-segments, however, the 3 Full Title sub-segments had actually showed some small renewed house price growth acceleration.

In short, FNB believes that the solid levels of 1st time buyer demand, following the 2008/9 recession, supported Sectional Title home buying a little more than that of Full Title buying in recent years. However, 1st time buying is more interest rate sensitive and thus more cyclical on average, and the result has been some tapering off in the strength of this source of demand recently. This may be key in cooling Sectional Title house price growth in recent times.

The “star performing” sub-segment has been the Sectional Title Less than 2 Bedroom segment, which still showed double-digit price growth as at the 2nd quarter of 2016. However, its price growth, like the other 2 Sectional Title segments, has also started to slow.

Read more here: FNB Property Barometer_House_Prices_by_Segment_26_July_2016