Research

Property Barometer – Estate Agent Survey – Secondary Home Buying

In the second Quarter 2017 FNB Estate Agent Survey, secondary home demand was mildly lower than in the prior quarter, although it is too early to identify a weakening trend. But agents have become a little less optimistic about buy-to-let demand prospects going forward.

Second property buying remains without strong direction, but FNB would expect some weakening in these times of poor sentiment

Secondary residential property buying is a sentiment driven affair, more so than primary residential demand. As such, in these current times of weak sentiment, FNB would expect to see some slowing in the pace of this non-essential form of home buying, and for primary residential demand to dominate even more.

To date, however, FNB haven’t seen strong signs of secondary demand slowing. Rather, it has moved broadly sideways at “mediocre” levels.

According to the FNB Estate Agent Survey, secondary residential property buying has averaged 12.05% of total home buying from 2010 to the first half of 2017. This seems to be a “normal” level in what has been a fairly average strength market since 2010. It is, however, well-down on pre-2008 boom time levels, having averaged 20% of total home buying in 2007.

In the second quarter 2017 survey, the agents surveyed estimated a secondary property buying percentage of 12.82%, not too dissimilar from that multi-year average, and down from the 14.47% estimate for the first quarter Estate Agent Survey. However, quarter to quarter the estimates can fluctuate, and one quarter of decline after the prior quarter’s rise doesn’t reflect any trend yet.

However, examining the three main motives for secondary home buying (second property buying for primary residential use by another family member/relative, buy-to-let and holiday home buying), we have seen recent direction in one of these.

Second property buying for other family members’ primary residence purposes increasingly on the back burner 

One features that has stood out in the survey of secondary and primary home buying motives, is that it is arguably the purchase of properties for primary residence use by another family member that gets “shelved” the quickest in more constrained financial times. This is perhaps understandable, as such purchases are not necessarily going to generate rental income and are also not for the benefit of the buyer him/her-self.

In the second Quarter 2017 FNB Estate Agent Survey, the estimated level of buying for this purpose slowed to a mere 0.49% of total home buying. This percentage has steadily declined from a multi-year high of 2.32% as at the third quarter of 2015. The latest percentage estimate is far down on that, and even further down on the 7% estimate back in early-2007, at the back end of the housing market boom.

Of the three main secondary home buying motives, therefore, this motive appears to have receded by far the most since the pre-2008 boom time highs.

And since the more recent renewed economic stagnation set in from 2012, and interest rate hikes from 2014, this category of secondary home buying appears to have again receded the most of the three categories.

Holiday home buying recedes in the first quarter

The estimated percentage of home buying believed to be for holiday home purposes also receded in the second Quarter 2017 FNB Estate Agent Survey, from 3.77% of total buying in the previous quarter to 2.55%. However, unlike the above mentioned category of buying, this represents only one quarter of decline to date, and thus too early to conclude a weakening trend.

Prior to the first quarter of 2017, this category of buying had seen a rising trend through 2016.

Buy-to-let estimate hasn’t weakened yet, but agent near term expectations have moderated 

The third main category of secondary home buying is the Buy-to-Let category. This category has shown no sign of decline in the estimated percentage of late. In the second quarter 2017 Estate Agent Survey, the respondents estimated buy-to-let buying at 9.77% of total home buying, slightly higher than the 9.16% of the previous quarter, and this category has seen a very slight broad rise since averaging 8.7% in 2015.

Although not perceiving weakening to have happened yet, the group of agents surveyed is gradually becoming less optimistic about future activity in the market segment.

As a follow up, FNB ask agents for their near term expectation of buy-to-let direction, i.e. “will buy-to-let home buying strengthen, weaken or remain the same in the next 3 months”?

In this survey response, the first two quarters of 2017 have seen a mildly elevated percentage of those expecting a “decrease” in buy-to-let demand, and a mild decline in those expecting it to remain the same or increase.

FNB assigns a 1 rating to an “increase” response, a 0 to an “unchanged” response, and a -1 to a “weaken” response, and then compile the aggregated FNB Buy-to-Let Market Confidence Indicator.

While this indicator remains in positive territory, indicating more agents still pointing to an expected increase than those expecting a decrease, the index level has declined noticeably from a 0.092 multi-year high in the third quarter of 2016 to 0.041 by the second quarter of 2017, the lowest reading since the third quarter of 2011.

This mild decrease in Buy-to-Let optimism amongst agents may relate to the perception of “Economic Stress/General Pessimism” amongst a sharply increasing percentage of agents, as recorded in a survey question put to them regarding their expectations of overall home buying levels and the reasons for their expectations.

Agents perceive a recent rise in level of investment properties being resold

In another survey question related to investment properties, FNB sees agents surveyed pointing to a slightly higher estimated level of investment properties being sold due to having achieved lower than expected investment income, expressed as a percentage of total home selling.

This percentage rose noticeably from 3% in the first quarter of 2017 to 7% in the second quarter, 7% being the highest estimate since the third quarter of 2011. In order to smooth the series, FNB applies a fourth-quarter moving average, and this measure too rose from 3% for the four quarters up to the first quarter of 2017 to 4% for the four quarters up to the second quarter of 2017.

Agents perceive reduced pricing power on resold investment properties

It goes further. FNB asks them to provide an idea of prices being obtained for investment properties being resold.

While as yet FNB have not seen agents indicating a rise in the percentage “sold below previous purchase price”, FNB have seen a marked rise in the estimated percentage being “sold at purchase price” and not above. This translates into a rise in the percentage of homes being resold at either purchase price or below, from a multi-year low of 15.25% of total investment property sales for the four quarters up to the second quarter of 2016, to 27.25% for the four quarters up to the second quarter of 2017.

Regional estimates of buy-to-let home buying – neighbouring Namibia has weakened sharply

Breaking down the estate agent buy-to-let buying estimates to regions, and using a second-quarter moving average for smoothing purposes (given smaller sample sizes at regional level), FNB have recently seen Nelson Mandela Bay to have the highest estimated buy-to-let buying percentage, to the tune of 15.2% for the first two quarters of 2017.

Given that this is the metro with by far the smallest survey sample size, FNB would caution against reading too much into these estimates yet, and a few more quarters’ surveys would probably be required to confirm strength.

In the larger metros, Cape Town has recorded the highest buy-to-let estimate of 11.1% for the first two quarters of 2017. This does not surprise us too much. That region has seen something of a “mini-boom” in its housing market of late, while all of the others have had weak markets, and this may be a mild sign of “over-exuberance” amongst perhaps less seasoned investors, jumping into buy-to-let at the top of a property cycle.

However, Cape Town’s buy-to-let remains moderate compared to pre-2008 boom time standards where the national average estimate reached around 25% of all home buying, so it doesn’t appear to be “over-exuberant” on a massive scale.

Actually, the real regional news emanating from the FNB Buy-to-Let Survey is more from neighboring Namibia, where the survey respondents have reported a sharp drop in buy-to-let buying.

From an estimated 24% of total home buying back in the second half of 2015 when we started the Namibia survey, that country’s estimated buy-to-let buyer percentage has dropped all the way to 8.5% by the first half of 2017.

This may partly have to do with the Bank of Namibia introducing Loan-to-Value limits on secondary property home loans, but also to do with would be investors losing confidence in a housing market that has slowed quite dramatically.

Conclusion

Although the second quarter Estate Agent Survey saw a decline in the estimated secondary property buying percentage, FNB would not yet draw any conclusions regarding a declining trend. However, within this category of home buying, the sub-category of “buying a home for use as a primary residence by a family member” appears to have already formed a noticeably declining trend.

But, in these times of weak domestic confidence, driven by a host of policy-related factors that have led to South Africa recently acquiring “junk status” from certain ratings agencies, along with more recent news that we are one of the few countries in the world to have been in a recession of late, FNB would expect some near term decline in overall secondary home buying. FNB expects this because, in tougher financial times, households on average would normally take on a more cautious approach regarding their finances, and secondary home buying is largely non-essential by nature.

But what do agents expect? It seems that they too have become a little less optimistic regarding the near term level of buy-to-let home buying (the biggest component of secondary property buying). Not only do less of the agents expect buy-to-let levels to increase in the near term, but they perceive a higher percentage of investment homes being resold due to having not achieved their expected returns, in recent times. They also  perceive a greater portion of these resold homes to not be achieving prices above the previous purchase price.

The slowing in agent optimism perhaps ties in with another survey response which shows a sharply higher percentage of respondents perceiving “Economic Stress/General Pessimism” in the market.

FNB expects to see a mild decline in the secondary home buying percentage estimate in the near term.

Read more here: FNB Property Barometer – Secondary vs. Primary Home Buying Trends – June 2017