The picture emanating from the sample of estate agents surveyed in the 2nd quarter of 2016 remained one of a “well balanced market”. However, indications are that the slowing demand trend has resumed in the 2nd quarter, after a brief stalling in the prior quarter, supply constraints are being alleviated, and the market balance may have begun to weaken.
It is early days, but some quarterly deterioration in indicators of market balance or price realism begin to hint at a possible shift away from market equilibrium to come.
• Average estimated number of viewers per show house declined to 9.64 in the 2nd Quarter of 2016, down from 11.6 in the prior quarter, and below the 11.05 estimate for the corresponding quarter a year ago. The cumulative decline in recent years has become considerable, from a high of 16.69 estimated in the 2nd quarter of 2013.
• The percentage of agents citing stock constraints as a factor in shaping their near term expectations declined to 10.7%, from 17.3% in the previous quarter. This is significantly down from the 24% high reached in the 1st quarter of 2015.
• The market remains well balanced. However, the estimated average time of properties on the market showed a noticeable increase from a previous quarter’s 11 weeks and 1 day, to 13 weeks and 4 days. Although it is too early to draw conclusions after only 1 quarter, and such an average time remains a fairly solid one still, this increase may hint at a near term shift in the market away from equilibrium.
• Agents reported a slight further rise in the percentage of sellers having to drop their asking price, from 88% in the previous quarter to 92% in the 2nd quarter of 2016. This is noticeably higher than the 78% recorded back in the 2nd quarter of 2014. The estimated average percentage asking price drop, on those properties where a price drop is required to make the sale, was -9%, slightly more than the -8% of the previous quarter, but unchanged from the 2nd quarter of a year ago.
• Agent perceptions of housing affordability have deteriorated mildly further, with as many as 31% saying that “income levels have got far behind house prices”. This is compared to 11% back in the 3rd quarter of 2014.
It is important to understand that, due to significant resistance by home sellers to house price declines, in times of economic and residential demand slowdown the residential market often moves away from market equilibrium price. Therefore, the average market house price level, as depicted by a house price index, is not necessarily the “market equilibrium” price.
In the residential market, there are various reasons for very strong resistance towards dropping prices to make a sale. Home sellers, for various reasons, are reluctant to sell for a lower price than what they purchased the house for, and often resist selling for a lower price than their often “inflated” idea of what the property is worth. This is due sometimes to the mortgage debt which they have to settle, sometimes to their belief that house prices never go down. It may also be because they see the home as an investment and measure of wealth, and its value thus far more important than that of their consumer items. This “downward resistance” also perhaps stems in part from the competition amongst estate agents to obtain the selling mandate, with the agent who quotes the highest selling price more likely to get that all-important sales mandate.
But perhaps a further key cause of this resistance is a miscalculation of the “holding costs” of a for sale home, should it remain on the market for a long time, as well as an “inflation illusion”, which means that if a seller has to wait a year to sell his house, due to an initially unrealistic asking price, it means that he has effectively dropped the asking price in real terms over that 12 month period, often without even realizing it.
Whatever the myriad of reasons, this resistance towards dropping prices means that, when one gets a drop in residential demand, such as back around 2008/9, house prices don’t necessarily fall sufficiently in the short run to keep the market in demand-supply equilibrium. Rather, there may be some real price decline (or perhaps not even a decline if demand slow down is mild), but simultaneously a significant rise in supply relative to demand, and an increase in the average time of homes on the market.
In such a case, the transaction prices being fetched in a relatively thin volume market may be above demand-supply equilibrium price level, with the market remaining oversupplied for a long period of time and home holding costs substantially elevated in many cases.
Given the market’s ability to move away from equilibrium price for lengthy periods, especially in times of economic weakening, it is important not only to focus house price trends. A sizeable part of the market weakness in such times can be seen in the estimated average time of homes on the market prior to being sold, with this average time often lengthening in periods where demand weakens but prices don’t fall “sufficiently”.
This is all very important for both mortgage lenders and that group of borrowers who become financially stressed. That’s because, in cases of mortgage stress, homes need to be “offloaded” quickly in order to settle debt and avoid big holding costs. Often, in order to quickly trade out of the property, the financially-stressed home owners have to go to a level considerably below market equilibrium price to do this, and this may be a “negative equity” situation where the price fetched is insufficient to settle the debt outstanding.
We’ve seen sufficient evidence of a broad economic weakening over the past 4 years or so, followed by the start of a rising interest rate trend from early-2014. And the FNB Estate Agent Survey has pointed to a broad slowing in residential demand from around 2014 (ignoring a temporary demand strengthening in early-2016), following the start of gradual interest rate hiking early in that year.
SLOWING DEMAND – REFLECTED IN THE NUMBER OF SERIOUS SHOWHOUSE VIEWERS DECLINING
One of the residential “demand-side” questions that is asked to the survey respondents, in the FNB Estate Agent Survey, is to give an estimate of how many serious viewers per show house they get before making the sale.
After a mild rise in this estimated average number of serious viewers per show house to 11.6 in the 1st quarter 2016 survey, up from 11.29 in the previous quarter (a mildly stronger summer 2015/16 period which may have caused a brief strengthening in average house price inflation a month later in the 2nd quarter), the multi-year declining trend resumed, with the estimate number of viewers declining to a lowly 9.64 in the 2nd quarter of 2016.
The cumulative broad decline in the estimated average number of serious viewers has become significant, from a 2nd quarter 2013 high of 16.69.
RESIDENTIAL SUPPLY CHALLENGES SUBSIDING
As residential demand broadly subsides, so it appears to have begun to contribute to the alleviation of housing supply constraints.
It is difficult to gauge the strength of supply of residential stock through asking survey respondents for their opinion. But when asking agents about their market expectations in the near term, we allow them to provide a list of factors that influence their expectations, both in a positive and a negative way
After these stock constraints had intensified noticeably from 2012 to early-2014, assisted by relatively low levels of residential building activity since the end of the building boom in 2008, they began to diminish through 2015, as one would expect in most slowing demand environments.
After a noticeable “once-off” rise in the percentage of agents citing stock constraints as an issue in the 1st quarter of 2016, the 2nd Quarter survey saw a resumption of the declining trend, from 17.3% of agents in the prior quarter to 10.7%, the lowest percentage since the final quarter of 2012.
SO ARE WE SEEING EARLY SIGNS OF THE START OF A SHIFT AWAY FROM MARKET EQUILIBRIUM PRICE?
The key question around the estimated average time of properties on the market is would be the average time on the market that reflects market equilibrium? The answer to this is a subjective one, but our view is that the level is not far from 3 months average time on the market. From 2014, the estimated average time had been moving broadly sideways at levels around 12 weeks, i.e. slightly less than 3 months, and this was a time with very mild average house price growth in real terms (zero average house price growth in real terms theoretically reflecting a well balanced market)
In the 2nd Quarter of 2016 survey, it is possible that we may have just received the 1st hint of the start a move away from market equilibrium. From a solid 1st quarter 11 weeks and 1 day estimated average time on the market, the 2nd Quarter 2016 estimate rose noticeably to 13 weeks and 4 days, the highest estimate since the 1st quarter of 2014.
However, given some volatility from quarter to quarter, it is too early to draw any conclusions based on a one quarter move, and 13 weeks and 4 days remains a reasonably solid level. But this is the most noticeable quarterly rise that we have witnessed in some years, suggesting the possibility of the start of a move away from equilibrium.
WE LOOK FOR FURTHER INDICATIONS IN THE EXTENT OF DROPPING OF ASKING PRICES
In another important indicator of “price realism”-of sellers relative to demand, agents have indicated a mildly deteriorated (higher) percentage of sellers being required to drop their asking price to make a sale since early-2014.
They have reported an increase in the percentage of sellers having to drop their asking price, from 81% in the final quarter of 2014 to 92% by the 2nd quarter of 2016.
FNB also asks agents to estimate the average percentage asking price drop on those properties where a price drop is required to make the sale. This average estimated drop increased in magnitude very slightly to -9% in the 2nd quarter of 2016, from -8% in the previous quarter, but is unchanged from the -8% recorded in the 2nd quarter a year ago.
Therefore, in the 2nd Quarter 2016 survey, the sample of respondents pointed to slight deteriorations in all 3 indicators relating to “price realism” relative to demand. Average time on the market was higher than the prior quarter, the percentage of sellers dropping their asking price was slightly higher, and the estimated percentage drop in asking price slightly more than the prior quarter.
As yet, these moves are not sufficient to conclude a trend away from market equilibrium. However, after 2 years of broad slowing in demand, as reflected in a declining average number of show house viewers, and a slowing percentage of agents citing stock constraints as a factor in their lives, the broader evidence does suggest that such a shift away from market equilibrium is possibly at hand in the near term.