Residential Demand Conditions – First time home buying

A key indicator of a residential demand strengthening can be a rise in first time buying. First time buyers are highly sensitive to economic and interest rate cycles, especially the latter. This is because of the high dependence of this younger group of aspirant buyers on credit to buy homes.

Given the first time buyer group’s being more financially constrained than many older repeat home buyers, changes in overall housing affordability, as determined by the combination of interest rates, income and house price levels, are thus very important to this group.

In the summer quarters of 2016/17, FNB saw two quarter-on-quarter rises in the FNB Estate Agent Activity Rating, and also saw signs of economic improvement approaching in a steady rise in the SARB Leading Business Cycle Indicator at that stage.

FNB have subsequently seen second quarter signs of renewed weakening in the market possibly approaching, with the Activity Rating (and SARB Leading Indicator) once again declining and agents reporting more widespread pessimism in the market.

However, those 2 prior summer quarters of improving economic conditions may still be behind a recent 3-quarter rise in the estimated level of 1st time buyers expressed as a percentage of total home buying.

In the second quarter of 2017 survey, the estimated first time buyer percentage rose from a previous quarter’s 20.59% to 21.41%, which represents the third successive quarter of mild increase from a multi-year low of 18% in the 3rd quarter of 2016.

Recently, we have seen housing affordability improving on a national basis. Interest rates haven’t risen further for almost one year, while average house price inflation outside of the Western Cape has been in low single-digit territory.

The net result, FNB believes, should have been some increase in the rate of first time buying when expressed as a percentage of total home buying, and this is indeed what has happened.

However, given the widespread apparent sentiment deterioration reported by agents in the second quarter survey, as well as renewed deterioration in the RMB Business Confidence Index and two months of decline in the SARB Leading Indicator in March/April, it becomes questionable as to whether this increase will continue from here onward.

First time buying by region – Gauteng tops in first time buying 

Examining estimated first time buyer percentages by major regions, FNB believes that the differences between regions are reasonably reflective of the divergent affordability trends between certain regions in recent years.

Using a two-quarter average in order to boost sample size by region, FNB sees Namibia’s first time buyer estimate of 13% for the first two quarters of 2017 being significantly lower than South Africa’s 21%. This should not be too surprising, given that Namibia has had in excess of 90% cumulative house price inflation since the beginning of 2010, compared to South Africa’s less extreme 40%.

Within South Africa, the stark contrast between Gauteng and the Western Cape is also apparent, the Western Cape’s first time buyer percentage slumping to a very low 6.64% for the first half of 2017.

By comparison, Joburg’s 28.58% and Tshwane’s 21.8% reflect a relatively affordable and price realistic Gauteng residential market.

This divergence, too, comes as little surprise, given that the Western Cape has experienced 75.8% house price inflation since the beginning of 2010 compared to Gauteng’s 40,1%.

Ethekwini (15.75%) and Nelson Mandela Bay (19.1%), having also had average house price inflation not far from the national average, experience first time buyer estimates not too far below the national average percentage of 21% for the 1st half of 2017.

Estimates of first time buyer panic 

Finally, a follow up question that FNB asks agents is what level of first time buyer “panic” they perceive, i.e. what percentage of aspirant first time buyers do they believe are scared that “if they don’t buy now they will never be able to afford a home in future, due to price inflation”?

Buyer panic can periodically cause a buying frenzy which can in turn cause widespread financial over-commitment and market “overshoots”.

This estimated percentage for the second quarter was 41%, which is the second consecutive quarter of healthy decline from a high of 52% in the final quarter of 2016.

In short, FNB believes that the further slight rise in the first time buyer percentage in the second quarter FNB Estate Agent Survey is still reflective of market improvements in the prior two summer quarters.

However, FNB are not convinced that they will see further increase from here onward, given the second quarter agent survey starting to report renewed sentiment deterioration. Examining regional divergences, FNB sees Namibia and the Western Cape experiencing relatively low first time buyer percentages, and believe this to be reflective of their more severe home affordability deteriorations in recent years relative to other regions. Gauteng comes out with the highest first time buyer percentages, further reflection of that province’s market price realism and good affordability after some slow market times in recent years.

Read more here: Property Barometer – Demand Conditions First Time Buying – June 2017