Segment pricing performance points to ongoing challenges

Posted On Thursday, 09 February 2012 02:00 Published by eProp Commercial Property News
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It should not come as too much of a surprise that growth in residential property transactions broadly slowed as 2011 progressed, as did growth in residential mortgages registered.

John LoosFNB's Household and Property Sector Strategist, John Loos says "this shouldn’t be surprising because the pace of improvement in home affordability slowed during 2011, or at least in the 1st half of the year (for which we have wage data with which to calculate affordability) and very likely in the 2nd half of the year too".

While the residential property market experienced a significant “mini-recovery” in 2009/10, a slowing in the pace of improvement in housing affordability in 2011 saw a flattening out in transactions growth, and ongoing financial pressures keep home buyers searching for affordability, which is reflected in the relative performances of property segments.

Viewing home affordability from a price relative to average employee remuneration perspective, there was a major improvement in home affordability for the average income earner from the 2nd quarter of 2008 until the end of 2010, due to the combination of average wage growth outstripping growth in house prices, and of course for those utilising credit there was been a major drop interest rates over much of that period.

Labour data runs behind national economic data, so the “traditional” affordability measures only run up until the 2nd quarter of 2011. At that stage, the average price/average labour remuneration ratio index (Q3 2000=100) had reached a level of 120.73. While still 20.73% up on mid-2000, this represents a massive -25.8% decline (improvement) on the peak of in-affordability reached in the 1st quarter of 2007. The second measure of affordability, i.e. the loan instalment value of a 100% bond on the average-priced house/average labour remuneration ratio (also in index form), has seen an even bigger decline of -47.9% since its peak as at the 1st quarter of 2008.

As from the final quarter of 2010, however, both of these affordability indices have been moving more-or-less sideways. Wage inflation has slowed to rates nearer to house price inflation, while interest rate cutting was halted from late in 2010.

"Therefore, unsurprisingly, we have seen broadly slowing volume growth in both residential property transactions as well as growth in residential mortgages registered, according to our estimates using Deeds data". Taking a 3-month moving total of property transactions by individuals below R5m in value (which should be overwhelmingly residential), from a peak of 29% year-on-year growth in September 2010, the rate of growth in these transactions had slowed to -2.1% negative growth by November 2011. Simultaneously, the volume of mortgage loans registered with the Deeds Office for individuals on transactions below R5m had seen year-on-year growth slow from an estimated peak of 56.5% in November 2010 to 1.7% by November 2011.
Data Source: Deeds Office Data


Residential and mortgage activity normally has a growth trend similar to that of vehicle sales, and this most recent cycle has proved to be little different. StatsSA figures depicting the year-on-year growth in the value of vehicle retail sales show a broadly similar trend to property transactions, having seen a growth peak near to 60% early in 2010, where-after this growth has been broadly tapering.

But while the growth trends have been similar in terms of timing, it is well-known that the residential “mini-recovery of 2009/10 never reached the intensity of the vehicle sales recovery. "This is due, we believe to the housing market having experienced far more extreme house affordability deteriorations in the boom years than did the vehicle market, largely because vehicle supply is unlimited by virtue of the fact that vehicles can be imported in large numbers should domestic supply not keep up with demand".

So, affordability in the housing market compared to pre-boom times still remains significantly worse despite improvements post the boom, whereas affordability has actually improved in the case of the vehicle market since the pre-boom years. Relatively speaking, therefore, it is easier for credit-dependent vehicle buyers to afford a vehicle loan relative to home loan applicants these days compared to relative difference in the pre-boom period early last decade, due to a massive shift in the relative affordabilities of the two assets.

This relative affordability challenge is a long term constraint for the residential market, as real prices are typically very slow at adjusting  downward following a price boom.

Furthermore, as mentioned in previous reports, motor vehicles are often further “to the front of the queue” than houses for many people in terms of buying priorities. This is due to the country’s lack of acceptable public transport for the middle to upper income echelons of our society, while the replacement cycle for cars is also significantly shorter than for houses.

Nevertheless, both the home transaction and vehicle transaction stats of late have been pointing to slowing growth, with both being interest rate sensitive, and both feeling a slowing in affordability improvements as measured by the loan instalment/average wage ratio during 2011.


Then, the matter of high and rising consumer price inflation through 2011, as experienced by the consumer, was a further constraint on affordability for would be home buyers.

The overall StatsSA Consumer Price Index  (CPI) is not reflective of the inflation rate that the average consumer feels on a month to month basis.

Firstly, this is because there are certain low frequency purchases included in it that have relatively low inflation rates, motor vehicles, along with the likes of clothing and footwear, and household furniture and appliances, being a few.

Secondly, owners’ equivalent rent is merely a notional rental for people who actually own their homes. Although it has one of the more significant weightings in the CPI, home owners don’t feel it, but it contains the overall CPI inflation rate due to its lowly 4.1% inflation rate.

It is many of the key high frequency and essential purchases that have had high inflation rates through 2011. Private transport running costs, dominated by petrol, still showed year-on-year price inflation of 22% as at December, despite some slowing. Electricity price inflation was reportedly running at 17.4%, the “big ticket” food CPI was inflating at 11.6% year-in-year, while “water and other services” (which includes municipal assessment rates and other housing related utilities bills) was supposedly rising at 9.2%. So the reality is that, for the purchases that affect households on a high frequency basis, the consumer price inflation rate is significantly higher than the 6.1% total CPI rate reported by StatsSA. High inflation is not just due to vivid imagination.


Given the above-mentioned ongoing affordability constraints, it shouldn’t be surprising to see signs of the search for home affordability continuing to be reflected in the relative performances of different housing segments in the latest FNB house price figures for the 4th quarter of 2011.
Indeed, in the FNB property segment data split by property size, we still witness the small-sized segment’s home price growth mildly outperforming the more expensive medium and larger-sized home price growth rates.

With regard to Full Title vs Sectional Title, the Full Title segment’s house price growth of 6% year-on-year as at the 4th quarter of 2011 remains significantly better than the Sectional Title market’s 0.1% growth rate in the same quarter.

While the average Full Title home value of R895,692 is significantly higher than the R686,993 Sectional Title segment’s average, when one compares “apples with apples”, breaking down the segments by room number, one sees that homes with comparable room numbers in the full title segment are cheaper on average than those in the sectional title segment. For instance, the Full Title segment’s major sub-segment is the 3 bedroom market, whose average price was measured at R926,771, lower than the Sectional Title 3 Bedroom sub-segment’s R953,067. So the “affordability drive” view still holds, with the cheaper Full Title 3 bedroom average price growth of 5% outperforming the Sectional Title 3 bedroom rate of 1.3%. In addition, on average one gets more in terms of space when purchasing a full title home compared to the sectional title equivalent.

It is questionable, though, whether people do their sums correctly with regard to home operating costs, and the rates and tariffs bill, when searching for the best value for money. If that was the case, sectional title may have been viewed more favourably when making buying decisions.

However, other cost factors may be supporting the Full Title segment more than the Sectional Title market. Much of the last decade’s building boom focused on suburban sectional title homes, and these were often located where land was more freely available and not always in ideal locations. Older established Full Title-dominant suburbs often have the established government schools, good infrastructure, and are better located relative to major employment nodes.

And finally, the Sectional Title segment may still be suffering from a greater degree of “over-building” in the boom years, having been a major target for the more cyclical 1st time buyer and buy-to-let demand. This may imply a still-greater oversupply waiting to be “mopped up”. "These abovementioned factors, we believe, continue to contribute to an ongoing better performance from the Full Title segment in the 4th quarter of 2011, compared to that of the Sectional Title segment" concludes Loos.

Last modified on Monday, 10 March 2014 14:21

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