Research

Property Barometer – Residential Market Activity Conditions

After a one quarter “spike” in the FNB Residential Activity Rating in the first quarter of 2018, FNB believes driven largely by a sentiment jump on the back of key political leadership changes early this year, ongoing economic weakness and rising costs of living appeared to resume their key influence on the housing market, with the rating falling back from 6.18 in the first quarter of 2018 (5.81 on a seasonally-adjusted basis) to 5.28 (5.37 on a seasonally-adjusted basis) in the second quarter of 2018.

Agent perceptions of ‘economic stress and general pessimism‘ have bounced back significantly, while those experiencing ‘positive consumer sentiment” have declined sharply.

While declines in the activity rating are broad-based regionally, Gauteng remains at stronger levels than the major coastal regions of South Africa, while Namibia still has the weakest activity rating within the broader Rand Area.

Estate agents in lower income/priced areas still provide stronger activity ratings than those at the high end of the market. This is understandable given the variety of tax and tariff increases in recent years, which have been biased more against high income earners and higher priced homes.

After a significant improvement in the first quarter, residential activity declines noticeably in the second quarter

Although disappointing, given the raft of poor economic news in recent weeks, FNB was not too surprised to see their second quarter 2018 FNB Estate Agent Survey pointing to the excitement of a change in the country’s President passing on, and a return to “normal” for the residential market in what remains a stagnant domestic economy.

The first quarter FNB Estate Agent Survey had seen a noticeable jump in the FNB Residential Activity Rating, and it was believed that much of this had to do with a significant improvement in sentiment strongly linked to key political leadership changes, most notably the change in the country’s President early in the year.

More recently, the second quarter FNB Activity Rating has merely moved back to a level almost exactly the same as that of the fourth quarter 2017 survey’s “Pre-Ramaphoria” level, suggesting a return to “business as usual” in a weak economy after a brief period of excitement.

Residential Activity subsides

Certain of their residential indicators are “leading” ones not only regarding the housing market’s future performance, but also with regard to the broader economy and business cycle.

Disappointingly, the second quarter FNB Estate Agent Survey appears to point to the likelihood of a weaker housing market (and perhaps economy too) in the near term, after a brief but very significant improvement in the first quarter of the year.

In the survey, the sample of agents questioned is asked to rate activity levels in their areas on a scale of ‘1 to 10‘, with ‘10‘ being a very strong level of activity and ‘1‘ being very weak.

From this, FNB has compiled their Residential Market Activity Rating for South Africa, and more recently for Namibia too, and this activity rating has shown itself to be a useful leading economic indicator much of the time.

After a few years of broad decline, from 2015 to late-2017, the first quarter of 2018 had shown a significant increase in the activity rating, both on an actual as well as a seasonally-adjusted basis.

From a multi-year low of 5.29 (5.38 on a seasonally-adjusted basis) in the fourth quarter of 2017, the activity rating had jumped to 6.18 in the first quarter of 2018 (and to 5.81 on a seasonally-adjusted basis).

The increase was perceived to be the result of a national sentiment jump largely driven by major changes in the country’s political leadership, most notably President Cyril Ramaphosa taking over as the country’s new President.

But South African households continue to live in a stagnant economy with very little growth to speak of, and as the novelty of the leadership change wears off it is seemingly back to “business as usual”, with the second quarter FNB Residential Activity Rating falling back to a lowly 5.28 (5.37 on a seasonally-adjusted basis), erasing the apparent “first quarter Ramaphoria” gains.

This renewed quarter-on-quarter decline meant that, on a year-on-year basis, the indicator went back deeper into negative rate of change territory, to the tune of -7.21%, noticeably worse than the –2.1% of the first quarter and similar to the -8% year-on-year decline of the fourth quarter of 2017.

Agents point to renewed deterioration in market sentiment

Sentiment is key to improved economic growth performance, driving businesses to invest more and consumers to spend more. Weak sentiment in both groups has been a major drag on investment and economic performance in recent years.

In the survey, FNB asks agents for their near-term expectations of residential activity. This answer is of limited use due to seasonal factors in the sector. However, as a follow up FNB asks them to cite reasons for why they expect what they expect with regard to activity levels.

They are free to provide any influencing factors that they wish. Back in the first quarter of 2018, 19% of respondents cited “economic stress/pessimism” as a perceived factor, which represented a significant drop from 36.7% in the previous quarter, a significant improvement.

By comparison, those that cited “positive consumer sentiment” in the frst quarter of 2018 were a far greater 56.7% of survey respondents, a percentage which had risen sharply from a mere 6% in the final quarter of 2017.

Now to the second quarter 2018 survey, and a sharp reversal has taken place. Those respondents pointing to “positive consumer sentiment” have dropped back to 18.5% of total respondents, while those pointing to “economic stress/general pessimism” have increased noticeably to a more significant 35.8%.

Delving a little deeper into the detail of the survey results, FNB finds that the 39.3% of respondents pointing to the change in the country’s President as the factor behind their perceiving positive consumer sentiment, in the first quarter survey, had largely fallen away in the second quarter.

Agents surveyed put the rebound in ‘general pessimism/economic stress‘ down to a variety of factors including economic weakness (recently confirmed by the first quarter economic growth rate which indeed did show a weaker economy early in the year), effective personal tax and VAT hikes recently, and petrol prices rising noticeably as global oil prices have risen.

Therefore, in the second quarter, FNB have quickly moved back to a situation where more agents point to “general pessimism/economic stress” than those who point to “positive consumer sentiment”, in an economy that remains under pressure.

Potential implications for new mortgage lending

For new mortgage lending, this can all have implications with a considerable lag. Residential activity starts to change when households begin to plan the home buying decision, viewing homes first for a considerable length of time, in many cases, before starting the home purchasing process.

Therefore, trend changes in growth in value of ‘Household Mortgage Loans Granted‘ (NCR Data) can often lag trend changes in the activity rating by as much to four quarters. This could mean that in the near term, after a recent acceleration, the stronger year-on-year growth rate in ‘New Mortgage Loans Granted‘ could come under pressure once more in the second half of 2018.

Regional Activity Ratings

Gauteng appears to be the region where residential activity improved most noticeably early in 2018 on the back of “Ramaphoria”, and it is Gauteng which has seen the most noticeable drop in its activity rating in the second quarter of 2018, from 6.84 back down to 5.5.

Gauteng’s activity rating, however, remains higher than the three Coastal Metros’ 4.95 combined activity rating, and FNB believes its superior activity level has much to do with its superior housing affordability (house prices relative to income), something that has for a while been reflected in very strong first time buying levels in that province (first time buyers with their financial constraints being more sensitive to home affordability levels).

Namibia weakened once more in the second quarter of 2018, and remains the weak region in the Rand Area, with a lowly 3.57 activity rating.

Namibia has recently been experiencing a recession, while its strong housing market run up until around 2015 was far stronger in recent than that of South Africa, creating a significantly greater home affordability challenge in that country. These two factors are believed to be largely behind its lowly Activity Rating in recent times.

When breaking the survey results down into smaller regions, FNB must always caution that sample size becomes smaller and results may thus be less accurate.

In order to address the sample size problem, FNB evaluateS the major South African/Namibian regions on a second-quarter moving average basis.

For the first half of 2018, the Namibian Average Residential Activity Rating still came in well lower than South Africa at 4.04 (South Africa averaged 5.73), and lower than any of the major South African cities. The Gauteng metro regions were noticeably stronger than any other major region.

Segmenting by Income Area – The Lower End outperforms

Viewing the four different income areas (as self-defined by the agents), FNB sees both South African and Namibia having their strongest activity ratings at the lower income area end of the area spectrum.

This has come to be expected in recent years, given a weak economic growth rate constraining household income growth, rising personal tax rates biased against the higher income groups, and with sharp increases in municipal rates and tariff bills which also work more against the higher end. All of these factors have caused a search for relative home affordability, resulting in a stronger performance at the lower end of the market.

Conclusion

In short, given the generally good correlation between the FNB Residential Activity Rating and the Leading Business Cycle Indicators for South Africa, the return to a more significant year-on-year rate of decline in the FNB Residential Activity Rating points not only towards renewed weakness in the housing market performance to come in the near term, but is also likely reflective of an economy remaining under pressure.

Of the estate Agents surveyed, there has been a major decline in the percentage of them experiencing ‘positive consumer sentiment‘, and a significant increase in those perceiving ‘economic stress/general pessimism‘ in the market. It appears that much of this turnaround, after a brief first quarter improvement in agent perceptions, is merely due to the brief excitement of a political leadership change wearing off, while the country’s household sector continues to grapple with a weak economic environment, and a rising cost of living. Positive political leadership changes can change economic fortunes for the better, depending on the policy measures introduced, but such impact is likely only to be felt in the much longer term.

Read more here: FNB Property Barometer – Residential Activity – June 2018