Slowing home buying continues to be very much about size

FNB has been saying that “smaller is better” when it comes to home buying. However, that does not preclude the smaller sized home market from experiencing a slowdown.

All of the factors that FNB has periodically claimed are more in favour of small-sized home buying remain relevant at the present time. The current economic environment remains weak, causing weak household income growth, and interest rates have risen mildly in recent years. Effective personal tax rates continue to rise, while municipal rates and tariff increases outpace general inflation. And, of course, there is the “sliding scale” for transfer duties, putting more expensing homes, which are on average larger, into higher transfer duty brackets. So, not surprisingly, the smaller-sized home market continued to outperform the medium and large-sized segments as at the 3rd quarter of 2016.

However, all of this does not prevent the smaller-sized market from going into a slowdown too, and indeed, while it remains the relative “out performer” of the 3 size segments, it has show signs of slowing of late.

In the FNB House Price Indices, FNB compile a set of 3 indices according to the size of homes.

Their 3 size categories are the Small-sized segment (homes 20-80 square metres in size), Medium-sized homes (80-230 square metres in size) and the Large-sized homes segment (230-800 square metres).

The house price inflation rates for the 3 categories continue to differ noticeably. The Small-sized home category’s (average price = R616,180) price inflation was the highest of the 3 segments, at 8.1% year-on-year in the 3rd quarter of 2016. However, this represents a slowing in growth from the previous quarter’s revised rate of 11.7% and the 1st quarter’s high of 11.9%.

Next was the Medium-sized home category (average price = R1.111 million) with 5.8% year-on-year price inflation, which reflects a slight de-deceleration from 6.6% in the 2nd quarter and 7.5% in the 1st quarter.

The large-sized home category (average price = R1.958 million) may be “stabilizing” a bit at very weak levels, having seen its inflation rate accelerate mildly from 1% year-on-year in the 1st quarter of 2016 to 3% by the 3rd quarter. At such a low price inflation rate, however, FNB cannot yet call this a “strengthening”, as the 3% rate remains significantly negative in real terms, when adjusting for general inflation, as measured by the CPI (Consumer Price Index), of nearer to 6%.

The Small-sized home category has “out-inflated” the other 2 categories for most of the time from 2010 onward. And if one evaluates the performance of the 3 size categories’ price indices since even further back from the 1st quarter of 2001, a more than 15 year period, we see that the Small-Sized segment has outperformed the other 2 on a cumulative inflation basis. The Smaller-Sized House Price Index has inflated by 372.9% since the 1st quarter of 2001. The Medium-Sized Index is not too far behind with 351.9% cumulative inflation over the same period. But the Large-Sized Segment has under performed by a significant margin, especially since around 2011, cumulatively inflating by a significantly lesser 285.3% since early-2001.

In short, the focus on size continues to be a key factor in the South African housing market, with “smaller remaining better”, still driving stronger house price inflation in the Small-Sized Segment compared to the other 2 segments. This relative “out performance” of the small-sized segment is expected to remain intact in the coming years, with especially the large-sized segment under performing noticeably, given the myriad of financial-related constraints mentioned in this note. However, that is not to say that the small-sized segment cannot also see a market slowdown, and indeed that appears to have been the case in the most recent 2 quarters.

Read more here: FNB Property Barometer House Prices by Size – 16th November 2016