Estimated average time of homes on the market declines
During tougher economic times, along with rising interest rates, the residential market often moves away from market equilibrium price due to resistance by home sellers to dropping their price. Alternatively put, prices can become less realistic, relative to demand, in times of weakening residential demand, and vice versa in times of strengthening demand, and this is often reflected in fluctuations in the average time of homes on the market prior to sale.
Therefore, the average 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.
This is what began to take place through 2016, as the average estimated time of homes on the market prior to being sold increased from 11 weeks and 1 day in the 1st quarter of last year to 15 weeks by the final quarter’s FNB Estate Agent Survey.
The key question 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. Therefore, FNB believes that the 15 week time on the market reflected a move away from equilibrium, and indeed the FNB House Price Index has shown some decline in house prices in “real” terms (i.e. when house price inflation is adjusted for CPI inflation), which would tie in with a market in “dis-equilibrium”.
However, in the 1st quarter of 2017, as signs emerge of some strengthening in the South African economy, the estimated average time of homes on the market declined from the previous quarter’s 15 weeks, to 13 weeks and 4 days.
Is this early indication of a residential market beginning to strengthen? As with many of FNB’s property and economic indicators, it is early days and too early to draw firm conclusions.
But it does come at a time when certain other key indicators have also shown signs of early strengthening,
Residential demand appears to be showing small signs of strengthening …
Also from the FNB Estate Agent Survey, the Residential Market Activity Indicator has seen two successive quarters of increase, from a 5.59 multi-year low (on a scale of 1 to 10) in the 3rd quarter of 2016 to 6.31 by the 1st quarter of 2017. Even when FNB statistically seasonally adjusts this indicator to remove the seasonal effects of summer, FNB finds a 2 quarter increase.
This ties in with one of the country’s key economic indicators, i.e. the SARB (South Africa Reserve Bank) Leading Business Cycle Indicator, which has been rising noticeably through the latter half of 2016 and into early-2017, pointing to a strengthening economy which should imply strengthening residential demand.
FNB believes, therefore, that the rise in the Residential Activity Rating was in part due to some increase in residential demand in the early stages of 2017.
… And possibly a small increase in residential supply constraints too
But a decline in the average time of homes on the market is about the interaction between demand and supply, not just about rising demand. In the FNB Estate Agent Survey, the estate agents are asked about their expectations regarding near term residential activity. As a follow up question, FNB asks then for the reasons why they hold the view they do. It is an open ended question, and one of the reasons that regularly crops up is the issue of “stock constraints”, i.e. a lack of available homes to sell.
The issue of residential stock constraints is by no means as acute as it was in the 1st quarter of 2015 when 24% of agents surveyed cited such stock constraints as a key issue in their areas.
But the percentage of agents citing stock constraints has risen recently from a low of 6.7% as at the 3rd quarter of 2016, to 12% by the 1st quarter of 2017, suggesting that residential supply relative to demand has once again tightened.
Under such conditions, one would expect homes to trade at a faster rate, and for the average time of homes on the market to decline, which is what appears to have happened in the 1st quarter of 2017
Cape Town remains the most supply constrained
Viewing the major metro regions stock constraint percentage, FNB sees that Cape Town’s sample of agents surveyed reported by far the highest percentage of residential stock constraints in their areas.
Using a 2-quarter average, i.e. the average for the 2 2016/17 summer quarters, FNB saw a massive 35% of agents surveyed reporting stock constraints in Cape Town. The next highest was Ethekwini Metro with a far lower 14% estimate.
Sellers being required to drop their asking price
A further indicator of residential asking price realism is the estimated percentage of sellers being required to drop their asking price in order to make the sale. This percentage remains high, at 90% of sellers, and as yet we have not seen a decline in it.
However, there was some diminishing in the estimated percentage by which the asking price is required to drop, from -10% in the previous quarter to -7.3% in the 1st quarter of 2017.
As in the case of many of our housing market indicators, the decline in the average time of homes on the market during the 1st quarter of 2017 is not enough to yet draw firm conclusions regarding a strengthening market trend emerging. A few more quarters’ surveys are required. However, viewing the 1st quarter decline in the average time on the market along with certain other indicators, a picture of early market strengthening does appear to be emerging.
The SARB and OECD Leading Business Cycle Indicators have been rising since late last year, as has the Residential Activity Rating. This should imply some strengthening in demand for housing. There has also been a 2-quarter rise in the percentage of estate agents citing residential stock constraints, suggesting a tightening in residential supply relative to demand.
Against this recent economic backdrop, it is conceivable that FNB could see the housing market shift back towards equilibrium, or alternatively put shift back towards greater price realism relative to prevailing demand, and that this should be witnessed in some decline in the average time of homes on the market prior to sale.
Key to this market strengthening, however, is how political and policy events unfold during 2017 in the run up to the December ruling party elective conference. Drought conditions have been alleviated, potentially boosting the Agriculture Sector’s growth rate, while improved global economic conditions and higher commodity prices can boost South Africa’s Mining and Manufacturing Sectors. Improvements in these economic conditions are reflected in recent rising trends in the Composite Leading Business Cycle Indicators for South Africa, which should impact positively on housing demand
But political volatility, and the ever present threat of ratings downgrades for South Africa, can change this improving economic scenario very quickly, should it exert significant downward pressure on investor confidence and the Rand. A sharply weaker Rand, should it happen, could mean a resumption of interest rate hiking due to an increase in imported price inflation. This is not the FNB base case. FNB’s most likely scenario is for unchanged interest rates throughout 2017. But these are the risks to that forecast.