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 level. Often, in times of market weakness, part of the weakness is reflected in the average transaction price, or its inflation rate, and part of it will be reflected in a longer average time that it takes to sell a home.
The key question around the estimated average time of properties on the market is what would be the average time on the market that reflects market equilibrium? The answer to this is a subjective one, but FNB’s view is that the level is not far from 3 months average time on the market. From 2014 to early-2016, 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 2016, South Africa appears to have seen a move away from that equilibrium, the 4th Quarter of 2016 survey showing still further movement in this regard. 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, increasing still further to 14 and 15 weeks for the 3rd and 4th quarters respectively.
Rising Average Time on Market a Delayed Response to Slower Housing Demand
The start of a noticeable increase in the national average time on the market early last year was arguably the lagged response to a slowing in housing demand through 2014 and 2015. Those were the 2 years of rising interest rates (up until early-2016), and FNB saw one of key the demand indicators from the survey declining noticeably.
This residential “demand-side” question 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.
From a multi-year high average 14.42 estimated serious viewers per show house for the 4-quarters of 2013, FNB saw a noticeable decline to 10.66 average for the 4 quarters of 2015. Hereafter, the broad movement was sideways, averaging 10.79 viewers for the 4 quarters of 2016.
But it mattered not that the decline in demand may have slowed or stopped in 2016. At these levels it was too weak to keep the market in a good balance between demand and supply.
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, FNB allows them to provide a list of factors that influence their expectations, both in a positive and a negative way
After the percentage of agents citing “stock constraints” as a key factor 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.
10% of agents cited stock constraints in the 4th quarter 2016 survey, well down from the 24% high back in the 1st quarter of 2015. In addition, this percentage is very much boosted by a far higher percentage in the Western Cape, perhaps the only region in South Africa still known for its very strong market.
But House Price Deflation Doesn’t Appear to have Become More Widespread Just Yet
Key now is to look for signs that a longer average time on the market is beginning to exert greater downward pressure on house price levels, as sellers are ultimately forced to accept reality? On a national average basis, that may have already begun to happen, with the FNB house price year-on-year inflation rate having slowed to a mere 1.3%
However, using Deeds data for property transactions by individuals, FNB has yet to see any noticeable increase in the percentage of properties being sold at a transaction price below that of their previous transaction price. Just after the last recession and interest rate cycle peak, back in September 2009, the percentage of properties transacted by individuals (“natural persons”), that were sold for a value below that of their previous transaction price, spiked to 22.1% of total property transactions in that month.
As economic recovery and interest rate cuts sparked a housing market recovery thereafter, this percentage slid to 10.6% by the end of 2014. From there onward, however, this trend turned from declining to more-or-less sideways, estimated at a similar 10.9% by November 2016.
As yet, therefore, a tougher selling environment, as reflected in a longer average time on the market, does not appear to have led to more widespread cumulative price deflation on homes in between transactions. But the rising trend in the average time on the market, should it not be reversed any time soon, can ultimately be expected to lead to such an increase in this percentage.