FNB’s main Household Sector theme continues to be “mounting consumer constraints” as South Africa proceeds deeper into its economic “super-cycle” stagnation phase. The FNB Estate Agent Survey has pointed in various ways to a more cautious and constrained household, with a declining trend in the level of “trading properties in order to upgrade to better ones”, as well as in some decline in levels of home maintenance and upgrades of late.
Increased caution and conservatism should impact more heavily on the higher end of the market, as the search for “relative affordability” escalates. 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. As could be expected, therefore, higher end area house price inflation appears to be slower than the lower end.
THE NEW HIGH NET WORTH AREA HOUSE PRICE INDEX SHOWS THE SLOWEST GROWTH
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 continue to point to the high end of the market being generally a bit weaker than the more affordable metro areas, as one would expect in these increasingly constrained economic and financial times.
Using Deeds data transactions by individuals, FNB compiles their 4 “core” FNB House Price Indices by Major Metro Area Value Band, namely Upper Income Areas (Average house price = R2.866m), Middle Income Areas (Average Price=R1.495m), Lower Middle Income Areas (Average Price = R918,336) and Low Income Areas (Average Price = R488,976).
On a year-on-year basis, FNB sees that the Low Income Area House Price Index showing the strongest growth, and actually having accelerated mildly, recording 6.4% year-on-year for the 2nd quarter of 2016 compared with a previous quarter’s 5.5%.
The most “steady growth” area value band in recent years, however, has been the Lower Middle Income Area House Price Index, recording the 2nd highest average price increase of 5% in the 2nd quarter, an unchanged rate from the previous quarter. FNB has found this segment’s average price inflation in the post-2008/9 recovery period to have been the most stable of the 4 area value bands.
With interest rates rising, municipal rates and utilities tariffs rising sharply, and effective personal tax rates being ratcheted up in a “no growth” economy, it is not surprising to see the Middle and Upper Income Area Segments’ average house price growth being the slowest at 3.9% and 4% respectively. Both of these segments’ price inflation rates have slowed from having had the 2 highest rates of the 4 segments back in 2014.
On a quarter-on-quarter basis, a better indicator of very recent growth momentum, the abovementioned relative performance positions in segments still hold.
However, a quarter-on-quarter growth slowing in the Low Income Area Index, from a previous of 1.9% to 1.7%, and a Middle Income Area Index growth slowing from 1.3% to 1%, suggest that these 2 segment’s year-on-year rates may also soon begin to slow.
A NEW AREA VALUE BAND INDEX FOR HIGH NET WORTH AREAS
Finally, FNB has added a new house price index to the array, namely the High Net Worth Area House Price Index. This Index is compiled from the higher priced areas within our Upper Income Area Segment Value Band, with a house price average of R4.3 million.
This index appears to emphasis the relative weakness at the high end, showing 2nd quarter 2016 year-on-year price growth of only 2.7%.
This growth rate is noticeably slower than all 4 of the main Area Value Band Indices’ price growth rates, providing further support for the perception that the high end of the market with its large and costly-to-run homes is the softer part of the market in financially tougher times.
Affordability appears to be an increasingly important factor in residential demand these days.
Recent area value band house price data continues to point to a weaker higher income/priced end of the residential market compared to Low and Lower Middle Income Areas.
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 slowed in recent years due to a multi-year economic growth stagnation, while interest rates have risen 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.
Perhaps not surprisingly, therefore, the FNB Estate Agent Surveys point to a decline in the rate of upgrading to better and more costly homes in recent times.
All of these above mentioned factors arguably count more against the higher priced end of the market. A greater search for affordability should be expected, and this should play “relatively speaking” into the hands of the lower priced end. We stress the word “relatively”, because this does not imply that the Lower end will remain strong. It too will ultimately feel the negative impact of economic weakness, just perhaps to a lesser extent than the high end of the market.