Due to significant resistance by home sellers to downward pressure on house prices in times of housing demand slowdown, house prices do not fully adjust in the short term. Instead, the residential market often moves away from market equilibrium price for lengthy periods of time. Such a move away from equilibrium is reflected in a rise in the average time that homes remain on the market prior to sale.
Many sellers are prepared to “wait it out” for their asking price. Eventually, many will get their asking price. What they may not realise, however, is that a lengthy waiting period in many instances means that their asking price has been declining in real terms during the waiting period on the market (“real” referring to house price adjusted for CPI inflation). This means that in actual fact they have been gradually dropping their asking price in real terms without actually realizing it.
This is all part of the concept of “money illusion” where people think about their money and wealth largely in nominal terms and not in real terms. The existence of such “money illusion” is often helpful in allowing the housing market to correct albeit over lengthy periods of time. If home sellers were to think about prices in real terms, they may hypothetically even resort to gradually lifting their asking price each week or month in line with broader price inflation in the economy, making market corrections even more difficult to achieve.
Indicators of market balance and price realism
Average time of homes on the market rises further
In recent times, the housing market indeed appears to have been gradually away from equilibrium on a national average basis.
FNB takes the, admittedly subjective, view that around twelve weeks (near to three months) average time on the market more-or-less represents a market equilibrium situation on a national average basis.
From 2014 to early-2016, the estimated average time had been moving broadly sideways at levels around twelve weeks, i.e. slightly less than three months, and this was a time with very mild positive average house price growth in real terms (zero average house price growth in real terms theoretically reflecting a balanced market).
Through 2016 and into 2017, the market appears to have been broadly drifting away from that equilibrium, and the third quarter 2017 FNB Estate Agent Survey reflected a continuation of this gradual trend. From fifteen weeks and four days in the previous quarter, the average time of homes on the market in the third quarter survey moved out slightly further to fifteen weeks and six days.
A greater percentage of sellers is required to drop their asking price to make the sale
A second question related to price realism and market balance is where we ask the agents to estimate the percentage of sellers ultimately being required to drop their asking price to make the sale.
While the majority of sellers normally tend to start high and allow themselves to be bargained down as a strategy, there is nevertheless a cyclical element to this behavior, and FNB has seen this estimated percentage of sellers having to drop their asking price creeping higher of late.
From a multi-year low of 78% in the second quarter of 2014, the market weakening since then has brought about a mild upward trend to 93% of all sellers dropping their asking price in the third quarter of 2017 (from 92% in the second quarter survey), according to the respondents’ estimates.
FNB also sees a larger magnitude of estimated average asking price drop
In the third quarter survey, the estimated magnitude of decline, for those being required to drop their asking price, also became greater. From -7% in the second quarter survey, the estimated percentage drop in asking price to make the sale increased to -9.8% in the third quarter survey. So more are dropping their price and by a greater magnitude too, according to the survey.
The shift away from equilibrium/deteriorating price realism is driven by weaker demand these days.
The noticeable increase in the national average time on the market since early last year was arguably the response to slowdown in housing demand since 2014.
FNB has seen mild interest rate hiking from early-2014 to early-2016, along with a multi-year broad economic growth weakening since 2010 to recent growth rates hovering not far from zero percent. The raft of negative political and investor-related news in the form of sovereign ratings downgrades keeps both consumer and business confidence very weak.
A key residential “demand-side” survey question that is asked to the survey respondents, in the FNB Estate Agent Survey, is to give an estimate of how many serious viewers per show house they get before making the sale.
From a multi-year high average of 14.42 estimated serious viewers per show house for the 4-quarters of 2013, we saw a noticeable decline to 10.66 average for the 4 quarters of 2015. Thereafter, the broad movement has been more-or-less sideways up to the present, averaging 10.49 viewers for the 4 quarters up to and including the third quarter of 2017 (and 10.29 for the third quarter of 2017 alone).
This indicator’s recent levels are thus significantly down from earlier highs, and read along with an increasing average time of homes on the market suggests that the lower level of demand these days is insufficient relative to the prevailing supply.
Stock constraints remain low
It is difficult to gauge the strength of supply of residential stock through asking survey respondents for their opinion. But when asking agents about their market expectations in the near term, we allow them to provide a list of factors that influence their expectations, both in a positive and a negative way
The third quarter Estate Agent Survey continues to point to relatively few agents citing stock constraints as an issue, after a decline all the way from 24% early in 2015. In the third quarter 2017 survey, only 8% of agents cited stock constraints as an issue, which is unchanged from the previous quarter, and well down on 2015 levels.
Having said that stock constraints are not a major issue these days, nationally, there does not appear to be a massive glut on the market yet either, with only 6% of agents citing “ample stock”.
Gauteng, the strong point within SA in terms of realism and balance.
Within South Africa, the shift away from market equilibrium, or towards less realistic pricing, has taken place more in certain of the country’s Coastal Metros, notably Ethekwini and Nelson Mandela Bay, where we have seen the average time on the market record twenty weeks and two days in the third quarter of 2017, virtually unchanged from the twenty weeks and three days in the previous quarter.
The Gauteng region, on the other hand, has been the “solid” region, having remained very near to an average time of 12 weeks on the market. However, it was this major region that showed a slight market weakening from quarter to quarter, with a slight increase in average time of homes on the market from twelve weeks in the second quarter to twelve weeks and four days in the third quarter of 2017.
The lower end is the “relative hot spot”
Examining the average time of homes on the market by Income Area segment, we see very wide differentials between the Lower Income Area end and the High Net Worth end, with the Lower Income end having far shorter average times on the market.
While high end homes do generally take longer to sell, we believe that the wide differential, i.e. 25.07 weeks in the case of the High Net Worth segment and 9.29 weeks in the Lower Income segment in the case of South Africa, also in part reflects a relatively stronger lower end of the market.
FNB says this because there has been a clear widening of the gap between the high and the low end as the market has weakened in recent years. Whereas the gap between Low Income and High Net Worth Areas’ average time on the market was 4.32 weeks in 2014, the gap had widened to a massive 14.48 weeks for the year 2017 to date.
On a national average basis, the rise in average time of homes on the market prior to sales continues gradually, reflecting a housing market moving away from equilibrium.
However, on a regional basis the picture remains divergent, with the Gauteng Metros appearing still far closer to equilibrium than certain of the Coastal Metros, notably Ethekwini which has quite a lengthy average time on the market by comparison.
The City of Cape Town market, renowned for its strength in recent years, appeared to be headed towards a longer average time on the market in the 2nd quarter of 2017, but made something of a comeback in the 3rd quarter, suggesting that its recent period of market strength may not be over yet.
Given the condition of the SA economy at present, it is likely that the rising national trend in average time on the market will continue. This should translate into further real house price decline (“real” referring to house price growth adjusted for CPI inflation) in the near term, as home sellers are gradually forced into greater price realism in a time of mediocre demand.
But the SARB’s “gradualist” approach to interest rate moves enhances the probability of the correction in real house prices, to a stage where the market moves back into equilibrium, being a relative gradual and “smooth” one. This is hopefully a very different situation from the shock to the market, accompanied by severe financial stress, in 2008 when it went from “boom to bust” in a relatively short space of time.