Property Insights: Price Realism and Market Balance

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 therefore developed indicators which assist in trying to ascertain whether there is a market moving away or closer to equilibrium, or otherwise put, whether housing demand relative to supply is strengthening or weakening.

An indicator of housing demand

Serious viewers of show houses remains moderate

In the third quarter of 2018, FNB saw a slight quarterly increase in the estimated average number of “serious” viewers per show house before sale. From 10.42 viewers in the second quarter, the estimate rose to 10.77. However, due to quarter to quarter volatility, FNB places little emphasis on these small quarterly movements, and use a four-quarter moving average to examine the broader trend.

The four-quarter moving average for the four quarters up to and including the third quarter of 2018 was 10.32 viewers, and this was very slightly higher than the 10.2 viewers for the four quarters up to the second quarter of this year. However, such movement is not yet of significance, and the average remains well-below the 14.42 high reached in the final quarter of 2013, just before the early-2014 start of interest rate hiking. The average number of viewers declined steadily through 2014 and 2015, before moving “sideways-to-slightly lower” through 2016 to the present time.

Indicators of market balance and price realism

Average time of homes on the market rose further in the third quarter of 2018

In the third quarter of 2018, FNB saw a further increase in the average time of homes on the market prior to sales.

From sixteen weeks and four days in the second quarter 2018 Estate Agent Survey, the average time of homes on the market rose to seventeen weeks and six days.

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.

The market has thus broadly been drifting away from that equilibrium level since 2016.

No  further rise in the high percentage of sellers required to drop their asking price to make the sale

A second question related to price realism and market balance is where FNB asks 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 third quarter 2018 survey showed a slight decline in this estimated percentage of sellers having to drop their asking price, from 96% in the previous quarter to 93%.

However, FNB does notread too much into this as quarter to quarter the data typically has some volatility. Important is that the percentage remains high, and significantly up on the 78% multi-year low reached at a stage of 2014.

FNB doesn’t see an increasing magnitude of estimated average asking price drop of late either

In the third quarter survey, the estimated magnitude of decline, for those being required to drop their asking price, became slightly smaller. From -9.2% in the second quarter of 2018, the estimated percentage drop in asking price to make the sale decreased to -8.6% in the third quarter.

Therefore, in the third quarter of 2018, homes were on the market for longer, but there was not a further increase in the already-high percentage of sellers dropping their asking price, nor was there a greater magnitude of price drop.

Stock constraints remain low

FNB sees very few agents pointing towards housing stock constraints in the market, and slightly more pointing towards “ample stock”.

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 third 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 3.4% in the second quarter to 5.4% in the third quarter. However, the percentage citing “ample stock available” also rose, from 7.3% of agents in the prior quarter to 8.0% in the third  quarter of 2018.

Stock constraints as well as major “gluts” thus both remain low in the second quarter, although the “ample stock” level remains slightly above the “stock constraints” level.

Regional comparisons

In the broader Rand Area’s major regions, Namibia remains significantly further away from market equilibrium than South Africa.

When breaking down the key indicators of price realism into the major survey regions, a key feature remains the weakness in Namibia relative to South Africa. The Namibian market is significantly weaker, and further from market equilibrium, than South Africa.

Whereas South Africa’s estimated average time on the market was seventeen weeks and six days in the third quarter of 2018, Namibia’s average time had risen further to thirty weeks and one day.

Gauteng remains the slightly stronger region within SA in terms of realism and balance.

Within South Africa, Gauteng appears mildly closer to market equilibrium than the three major coastal metro combined.

To boost survey sample size when breaking down the survey into more detailed major metro regions (to reduce volatility), FNB resorts to a second-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 16.50 weeks on the market for the two winter 2018 quarters, Nelson Mandela Bay 22.71 weeks, and Ethekwini 29.71 weeks.

By comparison, Greater Joburg (City of Joburg and Ekurhuleni Metros) has averaged a heathier 16.29 weeks and Tshwane Metro an even more impressive 11.93 weeks for the same two quarters

The lower end is the “relative hot spot” in both South Africa and Namibia

Examining the average time of homes on the market by income area segment, both South Africa and Namibia showed differentials between the lower income area end and the high net worth end, with the lower income end having shorter average times on the market.

However, it must be said that high end homes do generally take longer to sell, and this differential between the high net worth area segment on the one hand, and the lower income areas on the other, has narrowed in recent times as the lower end has also started to weaken more.

The high net worth area segment averaged 24.93 weeks on the market in the two winter quarters, while the lower income area segment had the shortest time of 14.29 weeks.

On a national average basis, a further increase in the average time of homes on the market was recorded in the third quarter of 2018.

This ties in with the current recessionary economic environment, and its negative impact on employment and disposable income growth, and ultimately on housing demand.

The most well-balanced/price realistic major regional markets appear to be found in Gauteng, most notably the Tshwane Metro region, which has 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 City of Cape Town has also been cooling off in recent times, a victim of its own strong market pre-2017 and the home affordability deterioration that resulted.

Read more here: Property Insights – Price Realism and Market Balance – 24th of October 2018