Secondary home buying levels could rise slightly in 2018, but are expected to remain in “moderate territory”. Despite FNB’s perception of an improving economy, and our forecast of economic growth being slightly stronger at 1.8% this year (compared to 1.3% last year), such growth projections remain weak, and are unlikely to substantially boost an increasingly taxed Household Sector’s Disposable Income growth meaningfully. A financially constrained environment is thus likely to remain, limiting growth prospects for secondary home buying.
Second property buying
Households as a group continue to be relatively cautious, and despite a slight rise in the estimated secondary home buying level when expressed as a percentage of total home buying, the estimated level of this source of demand remains “moderate”.
According to the survey, secondary residential property buying was estimated at 12.96% of total home buying in the first quarter of 2018. This is slightly higher than the previous quarter’s 11.99%. However, when unsure of how much of this is seasonal, it is arguably best to compare the percentage with the corresponding quarter of a year before, and compared with the first quarter of 2017 this estimate is down from a multi-year high of 14.47%.
The latest estimate also remains well-below the 20%-plus levels seen back around 2007/8 just prior to the market slump of 2008/9.
There are three key motives for secondary home buying provided in the survey, i.e. the buy-to-let motive, the holiday/leisure home buying motive and buying a secondary home to serve as a primary residence for someone else such as a relative or child.
Buying a primary residence for another person or household
In the first quarter survey, it was only the third and smallest motive, i.e. buying a primary residence for someone else, that rose quarter-on-quarter, from a lowly 0.37% to 2.01%. This is the strongest estimate in this small category since a nine-year high of 2.32% reached in the third quarter of 2015. This “jump” comes suddenly, and the estimates for this category of buying can be volatile, so we are cautious not to read too much into it.
However, FNB is well-aware of South Africa’s very weak household savings rate, implying many people ill-prepared for retirement, resulting in a need for support from younger family members in their older years. The phenomenon of “hiving” (three or more generations of a family in the same home), or in some cases buying another property for a family member, on a larger scale could be the result at some stage.
Is the rise in this survey estimate beginning to reflect the above challenges? FNB knows that up until 2009 the estimate for this motive ran at 5% and even more sometimes, so the desire seems to be there. But, of course, the financial constraints of the buyer are crucial here. It is too early to draw conclusion based on a one quarter rise, but this estimate is one to watch in future quarters.
Holiday or leisure home buying slightly down off recent highs
The second-largest category of secondary home buying, i.e. holiday and leisure buying, recorded a slightly lower estimate in the first quarter 2018 survey, to the tune of 3.18% of total home buying. This is down from the previous quarter’s 3.65% as well as down on the 3.7% in the first quarter of a year ago.
The recent 3%-plus levels are reasonably solid by historic standards, not the 5% high back early in 2007, but not the 1% lows at stages of 2010-2012.
Buy-to-let buying percentage remains in the ‘Doldrums’
The main category of secondary home buying is the Buy-to-Let category. This category has also shown a recent slight decline to 7.9%, from 8.55% in the previous quarter and 9.54% in the corresponding quarter a year ago.
This meant a continuation of single-digit buy-to-let buying estimates, which have been a feature for most of the time since 2010, and these are levels far below the above-25% estimates seen back in 2004 at the height of the housing boom.
However, while buy-to-let demand remains moderate, investment home selling does too. FNB asks agents surveyed to provide an estimate of the percentage of homes being sold due to lower than expected investment income. Using a four-quarter moving average for smoothing purposes, the four-quarters up to the first quarter of 2018 average a 4.46% estimated. This remains low compared to a 10.25% high reached back in the third quarter of 2010.
FNB deeds data studies also point to a very stable level of secondary home ownership with little movement
Moderate secondary home buying as well as selling is probably best reflected in FNB’s very stable estimate of secondary home ownership.
FNB estimates the level and change in ownership of secondary properties owned by individuals (“natural persons”) using deeds office data. Expressed as a percentage of total properties, ownership of secondary properties amounted to 16.26% of the total by December 2017. This is slightly down on a multi-year high of 16.31% reached in August 2017, while the year-on-year percentage change recorded a “close-to-zero_ -0.12%.
In short, “moderate but stable” is probably the way to sum up the way FNB sees the secondary home market of late, and how they expect it to remain in 2018.
FNB does not read too much into a quarterly increase in the estimated percentage for secondary home buying yet. It is possible that a some small rise in this percentage in 2018 will be seen, given an improvement in general sentiment early in 2018, and given signs that the economy could grow slightly faster. But forecast economic growth remains slow despite being improved, and effective tax rates on households continue to rise, so it remains a financially constrained environment where the more essential primary residential demand is likely to remain the overwhelming focus.
In addition, many buy-to-let buyers are more focused on capital growth prospects than on income yields, and as such tend to get more excited about buying when recent house price growth has been accelerating. FNB is not at that point yet, but do expect some pick up in house price growth in the near term. That can lead to some mild increase in buy-to-let buying levels, although their forecasts of a price growth acceleration from March’s 1% year-on-year to nearer to 5% would not be overly exciting.
A noticeable jump in the first quarter percentage estimate for “buying a secondary property for use as a primary home by another person, be it a friend or relative”, is interesting. But it will take a few more quarters of elevated estimates for us to become convinced that any trend has started in this area of home buying.