Early-2017 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, something it has consistently done since 2010. 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 the time being in terms of price growth. However, the Medium-sized category of homes no longer outperforms the Large-Size category in terms of price growth.
In the FNB House Price Indices, they have compiled 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 1st quarter of 2017, the house price inflation rates for 2 of the 3 categories, i.e. those of the Small and Medium-sized categories, were slowing.
However, the trend of smaller sized home house price inflation outstripping medium and large-sized home price inflation, remained intact.
The Small-sized home category’s (average price = R635,452) price inflation was the highest of the 3 segments, at 6.1% year-on-year in the 1st quarter of 2017. Nevertheless, this represents a slowing in growth from the previous quarter’s revised rate of 6.6% and the 1st quarter of 2016’s revised high of 9.6%.
However, the Medium-sized home category (average price = R1.121 million) was no longer the segment with the 2nd highest house price inflation rate. This segment’s rate slowed to 2.9% year-on-year in the 1st quarter of 2017, from 3.8% in the previous quarter. At the same time, the Large-sized home category (average price = R1.982 million) saw a mild house price growth acceleration from 3.2% year-on-year in the previous quarter to 4.1% in the 1st quarter of 2017.
All of the factors that FNB have periodically claimed are generally more in favour of small-sized home buying, as households search for greater affordability, 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 expensive 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 early in 2017. 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.
That the Medium-sized segment no longer outperforms the Large-sized segment, however, may be “value for money” forces at play.
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 395% since the 1st quarter of 2001. The Medium-Sized Index is not too far behind with 374.2% cumulative inflation over the same period. But the Large-Sized Segment has underperformed by a significant margin, especially since around 2011, cumulatively inflating by a significantly lesser 281.3% since early-2001.
At some point, such under performance in price growth leads to these homes becoming relatively attractive to a growing group of people as many medium-sized home values catch up with the larger-sized home values.
In short, the long term focus on size continues to be a key factor in the South African housing market, with “small remaining better”, still driving stronger house price inflation in the Small-Sized Segment compared to the other 2 segments in 2016. This relative “outperformance” of the small-sized segment is expected to remain broadly intact during 2017. But the fact that the FNB Medium-Sized House Price Index no longer outperforms the Large-Sized House Price Index reminds us that relative price growth outperformance of smaller-sized homes cannot continue indefinitely. Sooner or later the Larger-sized homes will become a little more appealing to a portion of households in terms of “value for money”, as medium and smaller-sized home values catch up, and as greater supply of new stock is built in the smaller-sized segment.
FNB does, however, remain of the view that smaller-sized homes are the future for many households, and that this size category will for a far greater portion of overall housing stock in years to come.