Middle class continues to be the main driver of property sales

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The 3rd quarter FNB Estate Agent Survey pertaining to the selling side of the residential market shows a very stable situation, with no major change from the previous quarter. While the need to “downscale due to financial pressure” and the desire to “upgrade homes” are still key drivers of residential property selling, South Africa’s ageing middle-to-upper income classes remain by far the single-most important driver of primary residential selling.

“Oldies” contribution to overall sales remains the big one

In the FNB Estate Agent Survey, one of the questions asked of survey respondents is to provide an indication as to the key reasons for selling. 8 categories of reasons for selling primary residential properties are provided. They are “Downscaling due to financial pressure”, “Downscaling 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”.

The largest percentage of sellers, i.e. 24% is believed to fall into the category “Downscaling due to Life Stage” as at the 3rd Quarter 2014 survey. This form of downscaling refers to those sellers who desire a smaller home, usually either because they are getting older or because their offspring have left home.

This estimated percentage of 24% is slightly lower than the prior quarter’s 26%, but remains near “record” highs”, and far above the low of 12% reached back in the 2nd quarter of 2008 in far weaker market times.

We believe this group of sellers to be “pro-cyclical” in their behaviour. They are not by-and-large financially stressed, and can thus wait for a “good time” to sell their property. They tend to come out of the woodwork in better market times. Therefore, the currently high percentage of these sellers, continues to be reflective of a relatively strong market.

However, as mentioned in previous reports, this high percentage also has partly to do with South Africa’s ageing population, especially in the middle and upper income groups, with the fastest growing age cohorts being in their 50s and 60s.

No sign yet of any noteworthy increase in financial stress-related selling, but the downward trend in this category appears to have all but ended

Our survey respondents in the 3rd quarter of 2014 continued to suggest that financial pressure-related selling (“selling in order to downscale due to financial pressure”), estimated at 15% of total selling, has more or less stabilized after a previous multi-year declining trend. Estimates for this category have moved in a very narrow range, between 14% and 15% over the past 4 quarters. The 3rd quarter 15% estimate is slightly up from the prior quarter’s 14%, but this variation is not significant.

At the current time, the percentage of sellers under financial pressure remains vastly improved from the 34% peak back in 2009, although a 15% estimate continues to reflect a still-significant portion of home owners who have for various reasons “overcommitted in terms of expenditure on their homes.

Reasonable nominal house price growth in recent times probably continues to make it relatively easy for households to trade out of properties without incurring too serious a financial loss, but it is conceivable that the interest rate hiking cycle could slow house price growth and make it tougher to do so at some stage..

Also appearing to have stabilized is the estimated percentage of sellers downscaling due to financial pressure that are planning to buy a cheaper property versus those planning to rent. In the 3rd quarter survey, the estimated percentage planning to “buy down” was 61% of total financial pressure-related sellers, versus 39% intending to rent.

This percentage was unchanged from the 2nd quarter survey, and mildly lower than the 66% believed to be buying down as at the 1st quarter survey. This apparent stabilization comes after a steady upward trend in the estimated percentage of these sellers intending to buy another home in the few years prior to 2014.

When we first questioned agents on the split between those “financial stress-related downscalers” planning to rent vs buy, back in the 2nd quarter of 2011, they estimated that 51% of this group were planning to rent a home versus 49% planning to buy.

By the 1st quarter 2014 survey, this had swung to 66% believed to be planning to buy vs only 34% planning to rent. Better property times therefore appear to see more financially stressed sellers “buying down” relative to “renting down”, and vice versa in the tougher economic and property market times.

The other key selling group is those households who are financially more solid and are planning to upgrade to a “better” home. The percentage of sellers selling in order to upgrade also appears to have stabilized following a prior steady upward trend. At 18% in the 3rd quarter 2014 survey, this percentage remains unchanged from the prior quarter, and slightly off its high of 20% reached at the end of 2013.

Looking forward, FNB’s expectation of further mild interest rate hiking through 2014/15 leads us to expect that “downscaling due to financial pressure” will see its percentage increase mildly in 2015, while upgrade-related selling will see its percentage decline.

Emigration selling still very subdued

Of the 8 categories of selling motives, the 4th one that we like to monitor closely is “Selling in order to emigrate”. This is particularly of interest with South Africa in a period of seemingly heightened social tension, and due to the fact that our surveys back in 2008 suggested that this motive for selling was one of the largest drivers of residential supply.

For the time being however, a deterioration in sentiment towards South Africa still does not appear to have brought about any noticeable renewed emigration surge. But this is believed to be due to economic and employment weakness abroad in recent years, and it is believed that domestic sentiment would have to improve prior to a further global economic and job market strengthening if we are to avoid returning to heightened emigration rates.

From a previous quarter’s 2.8% of total sellers, estimated emigration-related selling declined slightly to an estimated 2.7% of total selling in the 3rd quarter Agent Survey. The percentage thus remains hovering near the 3% mark, where it has been since 2012

In conclusion

An analysis of the various reasons for selling appears to confirm that we are still currently at a relatively strong stage of the property cycle, although things appear to be moving gradually from “improvement” towards “stabilization” as opposed to a prior noticeable improving trend.

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