2016 could see renewed slowing in the pace of new household formation

The odds appear stacked against first time buyers in a variety of ways of late, and 2016 prove to be the year in which the pace of growth in the formation of new households began to slow.

The FNB Estate Agent Survey estimates of first time buyer levels, expressed as a percentage of total home buying, have pointed to a noticeable slowdown in this source of residential demand through 2016 to date.

From an estimated 26% in the final quarter of 2015, the first time buyer percentage has declined to 18% by the 3rd quarter of 2016. This is significantly lower than the multi-year high of 28% reached in the 2nd quarter of 2014.

This means that the average year-to-date first time buyer percentage for 2016 is 20%, down from 2014’s 26.5% average.

The causes of this slowdown may be as many as threefold.

• Recent year’s housing affordability deterioration slows first time buying

Firstly, the obvious factor would surely be a deterioration in home affordability in recent years, in part due to average house price growth having, until recently, exceeded Per Capita Income growth, and partly due to mild interest rate hiking from early-2014 to early-2016.

This has caused some increase in the 2 main FNB Home Affordability Indices. The 1st measure, namely the “Average House Price/Per Capita Disposable Income ratio Index” has risen (deteriorated) by +4.8% from the 2nd quarter of 2013 to the 2nd quarter of 2016.

Add to that the past 2 years of interest rate hikes, and over the same period our 2nd FNB Home Affordability Index, namely the “Installment Value on a new 100% Bond on the Average Priced House/Per Capita Disposable Income Ratio Index”, has risen (deteriorated) by a more significant +20.6% over the same period.

The latter index is especially applicable to the highly credit-dependent 1st time buyer group.

• A lack of job creation is the 2nd key constraint

The 2nd factor believed to be playing a key role in slowing 1st time buyer levels is the deteriorating pace of employment creation, with entry into the housing market heavily dependent on income derived through successful entry into the labor market.

Economic growth has been broadly deteriorating since a post-recession high of 3.5% reached in the 1st quarter of 2011. Even with a 2nd quarter 2016 improvement in Real GDP (Gross Domestic Product) growth after a 1st quarter contraction, the 0.6% year-on-year growth rate is more likely a “job shedding” pace of growth than a “job creating” one.

And after a few years of economic stagnation, in the 1st half of 2016 it appeared that the lagged negative impact on employment was beginning to emerge. For the 1st time since the final quarter of 2010, the year-on-year rate of change in total employment turned negative to the tune of -0.7%. With the pace of new entry into the labor market seemingly slowed, the pace of new entry into the housing market could be expected to follow suit.

• Don’t count the impact of demographic factors out

But it may go a little further than the above mentioned affordability and economic factors, to demographic trends too. When examining the South African population estimates by age cohort for 2015 (using IHS-Globalinsight stats), one sees a steadily increasing number of people per age cohort from the 873,058 estimate for the 70-74 year old age group to the 6.659 million in the 25-29 year old age cohort.

However, the younger 20-24 year old age cohort shows a noticeably smaller 5.113 million number.

At some point, this smaller group may start, or have started, to impact on the pace of entry into the housing market.

The demographics are, however, believed to be a minor contributor, with home affordability and job creation believed to be the most crucial.

• Young buyers have indeed receded in significance

Using the Deeds data estimates of individual (“Natural Persons”) buyers of property by age group, FNB sees the most noticeable declining trend in the 20-29 year old buyer group, when expressed as a percentage of total buyers. This trend resumed around 2012 after a prior increase, and after peaking at 16.15 of total buyers, the number of 20-29 year old buyers receded to 12.32% of total buyers for the 3 months to August 2016.


The impact of a deterioration in housing affordability in recent years, a weak economy all but halting job creation, and a smaller number of 20-24 year olds compared to slightly older age cohorts, may be starting to cause a slowing in the pace of growth in new household formation in 2016.

According to IHSGlobalinsight estimates, there had been a noticeable acceleration in growth in the number of South African households, from a 2011 low of 1.3%, to 2.8% by 2015. This meant that the pace of household growth exceeded the estimated 1.5% population growth rate last year.

However, while FNB does not have population and household data for 2016 yet, the more noticeable drop in first time home buying suggests that the pace of new household formation may be slowing, or soon about to slow. This may be backed up by estimates pointing to a further decline this year in the percentage of property buyers in their 20’s.

Admittedly, the first time buying estimate does not provide the full picture on the rate of establishment of new households. New households can also be formed moving into the rental market.

However, FNB would expect at least a portion of aspirant home buyers who delay their purchase to remain in their family home for longer, as tougher economic times play themselves out.

Read more here: Property Barometer_First Time & Age Group Buying_2016