In recent times, the affordable end of the housing market has held up slightly better than the higher priced end. On a year-on-year basis our Major Metro Low Income Area House Price Index has even seen a growth acceleration of late. But on a quarter-on-quarter basis, the best way to examine recent growth momentum, all 4 of the major area value band segments have seen slowing house price growth recently, which ties in with all 4 segments having seen some transaction volume decline too. The recent broad-based slowing is about mounting financial constraints in the Household Sector, driven by recent years of house price inflation exceeding per capita income growth, rising interest rates, and growing concern among consumers about their economic and financial future in a very weak economy. As yet, though, there is not widespread financial stress.
Low Income Areas are Strongest, but Slowdown has Broadened
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 = R2.891m), Middle Income Areas (Average Price=R1.506m), Lower Middle Income Areas (Average Price = R921,886) and Low Income Areas (Average Price = R492,341).
On a year-on-year basis, FNB sees the Low Income Area House Price Index showing the strongest growth, and actually having accelerated mildly, recording 6.0% year-on-year for the 3rd quarter of 2016 compared with a previous quarter’s 5.8%.
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 4.2% in the 3rd quarter, mildly lower than the 4.6% rate from the previous quarter. FNB finds this segment’s average price inflation in the post-2008/9 recovery period to have been the most stable (i.e. fluctuating the least) of the 4 area value bands.
With overall housing affordability having deteriorated in recent years, caused by rising interest rates, deteriorating economic and household income growth, municipal rates and utilities tariffs rising sharply, and effective personal tax rates being lifted, the higher end of the market should perhaps have been expected to be the weak link. It is indeed, though not by far anymore.
The Middle and Upper Income Area Segments’ average house price growth was the slowest of the area value bands in the 3rd quarter, the Middle Income Area Segment recording 3.3% year-on-year average house price inflation, and the Upper Income Area Segment recording 3.9% for the same period.
In order to view recent price growth momentum, however, it is better to view quarter-on-quarter house price growth, in other words to compare a quarter’s house prices with the previous quarter, as opposed to the year-on-year rate where we compare a quarter with the corresponding quarter of a year before.
On a quarter-on-quarter basis, FNB now sees all 4 segments having shown a loss of price growth momentum.
The Low Income Area Index has seen its quarter-on-quarter growth slow from 1.7% in the 1st quarter of 2016 to 1.2% by the 3rd quarter. At slower rates, and bunched together at very similar growth, are the Lower Middle Income and Middle Income Areas with 0.7% growth, and the Upper Income Areas with 0.8%, all having slowed from the previous quarter’s growth rates.
FNB also views transaction volumes in order to analyse market strength.
Admittedly, transaction volumes do not always fully explain house price movements, as price trends are the result of supply versus demand levels. Low volumes can thus theoretically be accompanied by high price inflation should they have been caused by severe supply constraints in the residential market.
This may well have been the case, relatively speaking, with the Low Income Area Segment in recent times, which has had slightly higher price inflation than the other segments while also experiencing a decline in transaction volumes. Nevertheless, FNB does believe that the recent transaction volume decline across all 4 of the Major Metro Area Value Bands is a reflection of housing demand slowing.
FNB groups the transaction volumes of the areas included in our 4 Major Metro segments, and use a 6-month moving average to smooth what is otherwise a volatile data series. The Low Income, Lower Middle Income, and Upper Income Area Value Bands were all grouped together with a year-on-year decline around -2% for the 6 months to July 2016. The Middle Income Area decline was a slightly more significant -4%. Therefore, FNB sees this as further confirmation that all 4 segments have slowed, but the mildly higher price inflation in the Low Income Area Value Band compared to the rest may point to slightly more significant housing supply constraints at the low end compared to the rest.
Although year-on-year house price growth rates still showed a slight further acceleration in the Low Income Area Value Band’s house price inflation rate in the 3rd quarter of 2016, recent quarter-on-quarter growth rates point to all 4 area value bands’ house price inflation rates having started to slow. This points to the housing market slowdown having become more broad based across all major area value bands. However, while slowing, the Low Income Area Segment appears to still be mildly stronger than the other 3 segments.
The higher income end of the market has had some relative disadvantages to the rest. Effective income tax increases in recent years have targeted higher income households to a greater extent, as have large municipal rates and utilities tariff hikes. In addition, there is the sliding scale for transfer duty, rising to 11% when property values go above R2.25 million and 13% above R10m.
However, in a weak economy it is often the lower income segment of the population which suffers at the hands of “labour shedding” more severely than the higher skilled/higher income groups, while lower income households have less financial buffers to weather the storm caused by weak economic conditions and rising interest rates.
Both the higher and lower income groups thus have their set of challenges in the current environment. There is thus no obvious “clear winner” in the housing market at present when segmenting the market along area price bands.