On a national average basis, the first quarter 2018 FNB Estate Agent Survey showed a noticeable shortening in the average time of homes on the market prior to sales, pointing to a housing market possibly starting to strengthen in terms of housing demand relative to supply.
However, a look at the major regional breakdown points to very different regional housing markets. Gauteng appears the most price-realistic and relatively well balanced, averaging eleven weeks and five days’ time on the market, while the Coastal Metro markets average a far weaker seventeen weeks and six days.
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.
FNB has developed indicators which assist in trying to ascertain whether the market is moving away or closer to equilibrium, or otherwise put, whether housing demand relative to supply is strengthening or weakening.
Indicators of market balance and price realism
Average time of homes on the market declined noticeably in the first quarter of 2018.
In the first quarter of 2018, FNB saw early signs of housing market strengthening on a national average basis. Such signs did not yet include any strengthening in average real house price growth, but were seen in a noticeable rise in the FNB Estate Agent Survey’s Residential Activity Rating. This probably points to some strengthening in housing demand, although “activity” in an agent’s world is about the supply side as well as the demand side of housing.
This begs the question as to whether rising demand is beginning to have an impact on the housing market’s balance between demand and supply? The early indication is, yes, it is, although data can be volatile, so one quarter’s improvement is not a strong confirmation of strengthening yet.
But in the first quarter 2018 Estate Agent Survey, the housing market indeed appears to have moved closer to equilibrium, the key indicator of market balance being the agent estimate of average time of homes on the market prior to being sold.
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.
Up until the final quarter of 2017, the market had drifted away from that equilibrium level, reaching an average time on the market of seventeen weeks and two days at that stage.
The first quarter 2018 then saw a noticeable decline, though, from the previous seventeen weeks and two days to fourteen weeks and one day.
A smaller percentage of sellers is required to drop their asking price to make the sale too.
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.
The first quarter 2018 survey showed a decline in this estimated percentage of sellers having to drop their asking price, from 95% in the previous quarter to 91%.
Once again we caution that from quarter to quarter the data can be volatile. But like the average time on the market estimate for the 1st quarter, a decline in percentage of sellers dropping asking price also points to a shift towards strengthening of demand relative to supply.
FNB also sees a smaller magnitude of estimated average asking price drop.
In the first quarter survey, the estimated magnitude of decline, for those being required to drop their asking price, became smaller. From -10% in the final quarter of 2017, the estimated percentage drop in asking price to make the sale diminished to -8.2% in the first quarter of 2018.
Therefore, in the first quarter of 2018, all three key survey responses related to “market balance”, or “price realism”, point to a quarterly improvement in the balance between demand and supply of homes.
Stock constraints remain low
FNB does not see agents pointing towards a meaningful shift towards greater levels of housing stock constraints in the market yet.
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, FNB allows them to provide a list of factors that influence their expectations, both in a positive and a negative way
The first quarter 2018 Estate Agent Survey continues to point to relatively few agents citing stock constraints as an issue. The percentage of agents citing stock constraints as an issue rose slightly from 2% in the prior quarter to 3.4% in the first quarter. However, the percentage citing “ample stock available” also rose, from 2.7% of agents in the prior quarter to 6.7% in the first quarter of 2018.
Stock constraints as well as “gluts” thus both remain very low in the first quarter, and the fact that both estimates shifted slightly higher makes the survey responses inconclusive in this regard.
Gauteng remains the strong point within SA in terms of realism and balance.
Within South Africa, Gauteng appears far closer to market equilibrium than the three Major Coastal Metro combined.
Whereas Gauteng’s estimated average time of homes on the market was eleven weeks and five days in the first quarter of 2018, the aggregated Coastal Metro estimated was a far longer seventeen weeks and six days.
To boost survey sample size when breaking down the survey into more detailed Major Metro regions (to reduce volatility), we resort to a two-quarter moving average.
Using this two-quarter average at Metro level, the three coastal cities (Cape Town, Ethekwini and Nelson Mandela Bay) have been weaker than the major Gauteng regions. Cape Town, the best of the Coastal Metro regions averaged 15.21 weeks on the market for the two summer 2017/18 quarters, Nelson Mandela Bay 22.07 weeks, and Ethekwini 20.64 weeks.
By comparison, Greater Joburg (City of Joburg and Ekurhuleni Metros) has averaged a heathier 14.93 weeks and Tshwane Metro an even more impressive 10.64 weeks for the same two quarters.
On a national average basis, a noticeable decline in the average time of homes on the market was recorded in the first quarter of 2018, after a prior increasing trend.
This ties in with a first quarter indications of improved national sentiment amongst businesses, investors and consumers alike, and also with a 1st quarter jump in the FNB Residential Activity Rating (not covered in this report).
The strongest major regional markets appear to be found in Gauteng, most notably the Tshwane Metro region, which has by far the lowest average time of homes on the market of late.
By comparison, the three coastal major metros are relatively weak, especially Ethekwini and Nelson Mandela Bay, but the once strong City of Cape Town also appears to have cooled off.
Some of the decline in the average time of homes on the market is likely to be seasonal, given that the 1st quarter is typically a strong seasonal quarter for home buying. However, we can’t ignore the signs of a significant improvement in national sentiment, which appears to have been strongly driven by political leadership change in the country late in 2017 and early this year.
This wave of relative “euphoria” can only be sustained should it be backed up by meaningful policy and delivery change aimed at placing SA on a higher economic growth path.
For the time being, however, the residential market has showed strengthening signs early in 2018, but with the strengthening largely being a Gauteng Province story, and with Tshwane Metro appearing to be the Major Metro with the strongest demand-supply “fundamentals”.