2016 saw what FNB believes to be a long term trend continuing in terms of smaller sized home price inflation out-pacing that of medium and larger sized homes on average for the 7th consecutive year. FNB remains of the belief that there is a long term trend towards smaller home size, and that such home values can thus out-pace the Medium and Large-Sized categories for much of the time in terms of price growth. In times of more severe economic and housing market slowdown, such as the recession of 2008/9, it is possible this segment can “temporarily” under perform the others, being more cyclical than the Medium and Large-Size categories. FNB doesn’t, however, expect the 2017 economic conditions to be too severe.
In the FNB House Price Indices, FNB compiles a set of 3 indices according to the size of homes.
The 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).
In the final quarter of 2016, the house price inflation rates for all 3 of the categories were slowing. However, the trend of smaller sized home house price inflation outstripping large-sized home price inflation, with medium sized home inflation sandwiched in the middle, remained intact.
The small-sized home category’s (average price = R610,468) price inflation was the highest of the 3 segments, at 3.2% year-on-year in the 4th quarter of 2016. However, this represents a slowing in growth from the previous quarter’s revised rate of 7.9% and the 1st quarter’s high of 11.9%.
Next was the medium-sized home category (average price = R1.100 million) with 2.2% year-on-year price inflation, which reflects a deceleration from 5.8% in the 3rd quarter and 7.4% in the 1st quarter of 2016.
The large-sized home category (average price = R1.923 million) remained the “weak link”, slowing to 1.7% year-on-year price growth in the 4th quarter of 2016, from a previous quarter’s 2.5%.
All of the factors that FNB have periodically claimed are generally more in favour of small-sized home buying remain relevant at the present time. The current economic environment remains weak, though not in recession, 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. In addition, security concerns often drive demand for smaller homes in “secure” clusters.
So, not surprisingly, the small-sized home market continued to outperform the medium and large-sized segments for the year 2016 as a whole. This didn’t prevent the smaller-sized market from going into a slowdown too, though, but it remained the relative “out performer” of the 3 size segments.
On an annual average basis, the small-sized Home category’s house price inflation has out-paced the medium and large-sized categories every year from 2010 to 2016. 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, FNB also sees that the small-Sized segment has outperformed the other 2 on a cumulative inflation basis.
The small-sized FNB House Price Index has inflated by 368.5% since the 1st quarter of 2001. The medium-sized Index is not too far behind with 347.7% 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 278.6% since early-2001.
In short, the long term 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 in 2016. This relative “out performance” of the small-sized segment is expected to remain broadly intact over the longer term, with especially the large-sized segment under performing noticeably.
However, there is something of a “tipping point” that can be reached in times of severe economic weakness and significant interest rate hiking, where the small-sized segment’s superior house price growth can be “temporarily” halted. This segment can be more cyclical than the medium and large-sized segments at times due to it being a bigger target for the more cyclical 1st time buyer and buy-to-let groups. In tough economic times these groups fade faster than the repeat buyer groups, while financial stress can also proliferate faster in the small-sized segment during in such periods. So, in the very tough year of 2009, for instance, FNB saw the small-sized category experiencing the fastest house price deflation of the 3 to the tune of -7.6% for that year, compared to the medium-sized category’s -1% and the large-sized segment’s -3.6%.
2009 was a significantly tougher year than FNB expects 2017 to be, though, so the small-sized segment may still get it right to narrowly outperform the others this year. But it is always worth noting the risks, in this case that severe economic shocks can impact more heavily on this segment if and when they occur.