Research

Property Insights: Pro-Cyclical motives for selling homes recede

In the FNB Estate Agent Survey, one of the questions asked to respondents is to provide an indication as to the key reasons for selling properties. Eight categories of reasons for selling primary residential properties are provided. They are “down scaling due to financial pressure”, “down scaling with life stage”, “emigrating”, “relocating to elsewhere in SA”, “upgrading”, “moving for safety and security reasons”, “change in family structure”(death, divorce, etc)”, and “moving to be closer to amenities”.

Pro-cyclical motives for selling recede

Four of these selling motives, FNB believes to be “pro-cyclical”. In other words, these motives should normally recede in significance as the housing market weakens, and vice versa when the market strengthens. These four motives are “selling in order to upgrade”, “selling in order to downscale due to life stage”, “selling in order to relocate to another region”, and “selling in order to relocate closer to work or other amenities”.

In times of a weakening economy or rising interest rates, and resultant weakening in the housing market, less sellers may choose to upgrade to rising financial constraints and weaker confidence. Older sellers who reach a life stage where the home they have is too large for their purposes may aspire to sell to downscale, but a weaker market may cause a portion of them to delay this sale until they can achieve a better price at a later stage. A smaller portion may sell in order to relocate to another region in tougher economic times, due to less new employment and business opportunities to relocate to, and lower confidence levels may dissuade some from incurring the huge costs of relocating nearer to work or amenities for the time being.

All four of these pro-cyclical selling motives together made up 47.61% of total home selling in the third quarter of 2018, according to the agents surveyed. This represents a decline from 49.34% in the previous quarter, and is noticeably down from a multi-year high of 61% in the second quarter of 2014.

The gradual decline in this percentage of pro-cyclical reasons for selling homes is reflective of a multi-year economic growth stagnation since 2012, along with mild increase in interest rates from early-2014 to early-2016.

Upgrade-related selling weakens further, continuing to reflect a more conservative and financially-constrained consumer

A weak economy, and resultant weak consumer confidence, should cause a shift by many households towards being more cautious, or conservative, in their spending habits.

And indeed, this is what FNB has seen in the housing market in the form of a far lower percentage of sellers selling in order to upgrade to better homes, compared with 2013/14.

In the third quarter 2018 Estate Agent Survey, the estimated percentage of sellers selling in order to upgrade to a better home was 9.57%, thus appearing to resume a declining trend in recent quarters, having declined for two successive quarters from 13% at the start of 2018.

This percentage is now far below the 20% estimate achieved in the final quarter of 2013, just before interest rates started to rise.

Will the ‘oldies’ pace of down scaling moderate in a weaker seller’s market?

The third quarter 2018 survey saw a continued more-or-less sideways movement in the estimated percentage of sellers selling in order to downscale due to “life stage”.

This group has been the dominant force amongst the selling population in recent years, driven by strong growth in the 50+ age cohort’s numbers.

But a 24.53% of total selling estimate for this selling motive in the third quarter 2018 survey is lower than the estimated high of 29% at the start of 2017.

Will the pace older sellers’ down scaling decline? FNB had expected it from 2017 onward, but after a noticeable decline in the second quarter of 2017, off that first quarter 2017 high, we have seen this percentage move more-or-less sideways.

While this group of sellers may want to downscale, because they no longer need the “over-sized” home that they have, given their life stage, they are in theory not under too much financial pressure. So, if the market weakens, as it has done in recent times, a portion of them could conceivably decide to wait for a better market period at some future stage before trying to sell, in order to realise the best capital gains possible.

FNB will watch this in the coming quarters, but for the time being this motive for selling remains the single-biggest one of the eight major reasons.

Selling in order to relocate to another geographical region has declined noticeably

The impact of the economic slowdown appears to have started to meaningfully affect the level of selling in order to relocate to other parts of South Africa.

The more affluent members of society are increasingly searching for lifestyle, and are often prepared to relocate for it.

However, the bulk probably still relocate mainly for economic/employment opportunity, and there are less such opportunities being created when an economy is in recession.

Given that South Africa is currently in a recessionary environment, it is therefore not surprising to have seen a decline in this estimate in the past twp quarters, from 10.02% of total selling as at the first quarter of 2018 to 7.27% by the third quarter 2018 survey.

Predictably, the tougher economic times of late appear to have broadly slowed relocation closer to places of work and amenities

In tougher financial and economic times, the costly nature of property trading and less “job hopping” can cause a slowing in selling in order to relocate closer to places of employment or amenities (such as schools).

Indeed, the agent survey has pointed to such a broad slowing since 2014. In the first quarter of 2014, this motive for selling was estimated at 10% of total home selling. By the third quarter of 2018 this estimate was 6.24%.

The survey recently points to a more noticeable rise in financial stress-related selling

Economic stagnation since 2012, and a gradual rise in interest rates from early-2014 to early-2016, has brought about a gradual rise in financial stress-related selling since around 2016.

The estimated percentage of sellers “selling in order to downscale due to financial pressure” was 16.3% in the third quarter of 2018, which is up from 15% in the previous quarter and now noticeably higher than the 11% low as at the third quarter of 2015.

However, this percentage does remain moderate compared to the 34% high reached in the second quarter of 2009, at the end of the 2008/9 recession and just after previous interest rate hiking cycle peak.

The survey respondents may be suggesting a significant deterioration in the confidence levels of those sellers down scaling due to financial pressure as a group, though.

FNB says this because the agents believe that within the category of sellers selling in order to downscale due to financial pressure, the estimated percentage of those intending to “rent down” as opposed to “buy down” has increased noticeably, from 40% in the first quarter of 2017 to 65.6% in the third quarter of 2018.

The rental option is often the cheaper and lower cash flow risk option, so a rise in the percentage intending to “rent down” as opposed to “buying down” points to some decrease in confidence amongst this group of financially pressured sellers.

Emigration rate creeps up gradually

The “selling in order to emigrate” motive for selling is one that we have been watching closely in recent years, given signs of rising “social tensions”, along with recent years of economic growth stagnation in South Africa.

And indeed, the survey respondents have been pointing towards a gradual rise in the percentage of sellers selling in order to emigrate, from a low of 2% back in the final quarter of 2013 to 8.6% of total selling by the third quarter of 2018.

This is not yet extreme when compared to the estimate reaching as much as 20% at a stage of 2008, but that 2008 market was a very “thin” market. However, the rising trend is a concern from an economic performance point of view, as emigration-related home selling in many instances represents highly skilled labour departing for foreign shores.

The broad picture emanating from the FNB Home Selling Estate Agent Survey remains one of financial constraints and caution, in an environment of economic weakness and uncertainty.

The four “pro-cyclical” motives for selling as a group continued their gradual decline, as a percentage of total selling, reflective of broad market softening since 2015.

FNB believes that the still-high level of selling in order to downscale due to life stage is not only driven by strong growth in the size of the older middle and upper income population numbers, but also due to a sizeable group of the ageing population wanting to “offload” larger homes, that are increasingly costly to operate, in favour of smaller and less costly homes. However, in recent quarters this group’s percentage has been down from an early-2017 high, which could mean a portion of ageing home owners deciding to postpone such down scaling until a later stage when the market is hopefully a better sellers market than the current time.

A sign of relative caution these days is the relatively low level of selling in order to upgrade homes compared with 2013/2014. A greater portion of home owners thus seem intent on “staying put” for the time being.

Relocating to another region has declined noticeably in the past two quarters’ surveys, probably starting to reflect a decline in new economic opportunities to relocate to in a recessionary environment.

Relocating closer to places of employment and amenities has seen a significant decline since 2014, reflecting more cautious and financially constrained households perhaps “staying put” for the time being in greater numbers.

There is a gradual increase in financial “stress”, with an increased percentage of sellers selling to downscale due to financial pressure. This group may also be becoming more “cautious”, with recent quarters’ surveys showing a sharp rise in the estimated percentage believed to be taking the less risky “rent down” route as opposed to the “buy down” route.

Finally, a key concern that remains is the ongoing uptick in emigration-related home selling. At 8.6% of total selling in the latest survey, this percentage is becoming significant, and not far away from double-digits. Such an increase is never positive given that it probably represents a rise in the departure rate of skilled members of the labour force.

Read more here: Property Insights – Reasons for Home Selling – October 2018