Examining the 2nd Quarter 2016 FNB Estate Agent Survey results for Residential Market Activity and Demand perceptions of agents, it would appear that the 2nd quarter once again points to housing market and possibly economic weakening coming. This comes after a mild strengthening in the 1st Quarter results, and it was that 1st Quarter improvement that may have been reflected in mildly faster national average house price growth 1 quarter later in the 2nd Quarter of this year.
FNB ESTATE AGENT SURVEY MARKET ACTIVITY RATING
The South African component of the FNB Estate Agent Survey is a survey of a sample of estate agents predominantly in SA’s major metro regions. A key question asked to agents is with regard to their perceptions of residential market activity in their areas, a subjective question on a scale of 1 to 10, with 10 being the strongest level of activity.
The 2nd Quarter 2016 Residential Activity Indicator declined to 5.77, from the previous quarter’s 6.39. The cumulative decline has now become noticeable since the 6.73 high of the 1st quarter of 2015.
Quarter-to-quarter fluctuations, however, can be driven to a significant degree by seasonal factors prevalent in the housing market. To examine the strength of the market excluding seasonal factors, FNB creates a statistically Seasonally Adjusted Activity Rating. According to this measure, too, the Activity rating dropped in the 2nd quarter of 2016, from 6.11 in the 1st Quarter to a level of 5.9.
Given such a decline in the Activity Rating, this could beg the question as to where the 2nd Quarter acceleration in average national house price inflation comes from (which FNB outlined in their previous Property Barometer report on 4 July 2016). Important is that house prices are not merely determined by activity levels but by the level of supply versus the level of demand. Furthermore, however, the 2nd Quarter rise in house price growth has more to do with demand and activity levels in preceding periods. And in the 1st Quarter of the year, while the non-seasonally-adjusted Activity Rating rose from the prior quarter, the Seasonally Adjusted Activity rating saw its downward trend virtually “temporarily” stall at 6.11, almost unchanged from 6.12 in the final quarter of 2015.
This virtual “treading of water” in activity levels appears to have been brought about by a slight rise in demand during the 1st Quarter, which respondents in the survey point towards when estimating the average number of “serious viewers” of show houses. In the 1st Quarter 2016 survey, they estimated the average number of serious viewers per show house to have risen from 11.3 in the preceding quarter to 11.6, but more significantly, this was up from the 11.05 viewers for the corresponding quarter of 2015.
In short, the FNB Estate Agent Survey pointed in some way to a “temporary” stalling in the national housing market’s weakening demand and activity trend during the 1st quarter of 2016. This is perhaps reflected in a slightly improved house price growth rate a quarter later in the 2nd quarter of 2016. However, during the 2nd quarter, a resumption of weakening in demand and activity levels, as perceived by respondents in the survey, suggests that a return to slowing average house price growth could resume in the near term.
THE ACTIVITY RATING AS A LEADING ECONOMIC INDICATOR
In the Residential Activity Rating’s short 12 year history, the short term trend changes in its year-on-year rate of change appear to have very often led or corresponded with the trend changes in Leading Business Cycle Indicators such as those of the SARB (Reserve Bank) or the OECD, as well as leading real economic growth. Renewed Activity Rating decline in the 2nd quarter may thus point to renewed economic weakness to come in the 2nd half of 2016.
RESIDENTIAL ACTIVITY EXPECTATIONS – ECONOMIC WEAKNESS BEING INCREASINGLY FELT
On balance, agents expected very little near term strengthening in residential activity levels in the 2nd quarter survey. FNB asks agents for their expectations of residential activity levels in the near term, i.e. the three months subsequent to when the survey takes place, requesting them to choose between 3 options, namely that activity will “strengthen”, “weaken”, or “remain the same”.
In the 2nd quarter survey, 13% of agents expected activity to increase in the next 3 months, while 57% expected it to stay the same and 30% expected a decrease in activity.
This weak expectation is to be expected when one moves into the slow winter period, seasonality thus playing a major role in dampening expectations. Nevertheless, recent weak readings appear to be more than just about seasonal factors.
The “Home Buying Confidence Indicator” in its unsmoothed form, the combined result of the various agent expectations, declined from the previous level of +0.01 (on a scale of 1 to -1) to -0.17, as one could expect with the winter season’s lull approaching at the time of the survey. However, it is also lower than the 2nd quarter of 2015’s positive reading of +0.01, implying a year-on-year decline.
In order to examine the broader picture regarding estate agents activity expectations, eliminating seasonal factors and data volatility, FNB uses a 4-quarter moving average of the “Home Buying Confidence Indicator”. This 4-quarter average for the indicator has shown a noticeable decline to a low similar to that last seen in early-2012.
Therefore, even free of seasonal fluctuations, the Home Buying Confidence Indicator of recent quarters has pointed to a sample of estate agents’ expectations moderating.
In a follow up question to the agent activity level expectations questions, we ask agents to provide us with the factors that influence their near term expectations of activity in either a positive or negative way.
Of key concern, though not surprising, is that the most commonly cited factors relate to “Economic Stress/Pessimism”, cited by 41% of respondents, while “Positive Consumer Sentiment” is only cited by 9%.
This reflects a broad deterioration in agents’ perceptions of sentiment in the market, with the percentage citing “Economic Stress/Pessimism” having risen steadily since early-2015, while the percentage citing “Positive Consumer Sentiment” having declined further over the same period.