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4TH Quarter 2009 - Ending the last decade on a strengthening note, but financial stress and affordability issues are far from over
The 4th quarter FNB Property Barometer survey of a sample of estate agents highlights
some of the dominant “issues” for residential property in both the short and long term.
In the short term, its latest results point to further very slight strengthening in demand, but
also that the pace of increase in demand may be starting to taper, posing the question as
to how long the current recovery will still continue, especially given a lack of further
interest rate cuts..
The demand activity rating, provided by the agents, shows an almost sideways movement
in activity levels from a previous quarter’s level of 5.65 in the previous quarter to 5.68 in
the final quarter of 2009. Year-on-year growth in activity is still substantial at 23.7%, but
this is down on the previous quarter’s 36.8%, which may well be an early sign that activity
will find a higher “plateau” at a later stage in 2010, as last year’s interest rate stimulus
starts to wear off. The highly-cyclical first-time buying component of total buying has
increased in importance, but low yields and a lack of capital growth appear to be keeping
buy-to-let activity subdued.
The second key issue highlighted by the Barometer results relates implicitly to an
oversupply of property, which is sustained by unrealistic pricing in many cases as well as
financial pressure on households.
Agents still report widespread lack of realism in pricing, with the overwhelming majority of
sellers having to drop their asking price. However, there appears to have been some
improvement in this regard, as they simultaneously report the second successive quarter
of substantial decline in the average time that a property is on the market prior to being
sold, from a 2nd quarter peak of 21 weeks and 1 day to 13 weeks and 2 days in the 4th
quarter . Agents also continue to report widespread financial stress. They claim 24% of
sellers being those that are selling in order to downscale due to financial pressure. This
has improved from above 30% earlier in 2009, but is still troublesomely high.
A third “focal point” is that is the demographics of buyers. Racial transformation remains
an ongoing issue for all sectors of the economy, and its progress can to a degree be
measured in residential buying activity. In 2009, the percentage of buyers that the agents
estimated to have come from the so-called Black population group amounted to 29.5%
(Bear in mind that the survey is dominated by former “White Suburbs”), slightly lower than
the 30% of the previous year, but this group has made the most gains from its 23% of total
buyers in 2005. The so-called White group by comparison saw its percentage of total
buying shrink from 57% to 53% from 2005 to 2009, while the smaller “Coloured” and
“Asian” groups remained relatively stable. The trend is not surprising, given that the Black group has grown its disposable income the fastest off the lowest per capita base.
Finally, the Barometer survey indicates that in the past 2 quarters only a minority of agents now believe that “incomes are far behind property price levels, i.e. they believe that in-affordability is significantly less of an issue compared to the first half of last year. This is probably more to do with interest rate cuts, along with some house price deflation, rather than with any strength in income growth.
While we agree with the agents’ views regarding an improvement in the “traditional” measure of affordability, which largelylooks at house price relative to income, while also throwing the cost of credit into the mix, we nevertheless believe that affordability will still be the key issue in the current decade, but in a very different form. The traditional measure of affordability, i.e. home price versus income, is perhaps no longer as important as a year or two ago. The cost of servicing debt, while still high and troublesome due to the sheer size of the
Written by: John Loos
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