Lower end appears to have had the healthier fundamentals in 2011:FNB

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The FNB Estate Agent Survey suggests that the metro market segment that agents define as the Lower Income Segment showed the strongest demand-supply “fundamentals” of the 4 “suburban” income segments during 2011, while the so-called High Net Worth segment was the noticeable weakling.

The survey asks agents to place the areas that they serve into one of 4 categories, i.e. High Net Worth areas (average price = R3.7m average in 2011), Upper Income areas (average price = R2.2m), Middle Income areas (average price = R1.2m), and Lower Income areas (average price = R679,000).
 
One of the key questions asks agents to provide a subjective rating of demand in their area on a scale of 1 to 10. As one views the estimated demand levels in the different segments, one sees that the Lower Income segment was the only one to rise mildly in 2011, compared with average demand in 2010, thus becoming the segment with the strongest demand rating of 6.12 average for last year. The Middle Income segment follows closely with a rating of 6.04, which represents a slight weakening on 2010, while the Upper Income (5.64) and High Net Worth (5.42) segments were noticeably weaker.
 
Through 2010 and 2011, the High Net Worth segment’s demand rating has been significantly weaker than the other 3 segments, although the Upper Income Segment’s weakened demand rating narrowed the gap with the High Net Worth Segment in 2011.
 
A further question relates to estimates of the average time properties remain on the market prior to being sold. Using the average time of homes on the market prior to sale as a proxy for the balance (or imbalance) between demand and supply, the Lower Income segment once again outperformed the rest in 2011, keeping its average estimated time of homes on the market virtually unchanged at 13.8 weeks in 2011. By comparison, the 3 higher priced segments all showed a noticeable rise in average time on the market for 2011 as a whole, with the Middle Income Segment averaging 15.5 weeks (compared to 13.5 weeks in 2010), the Upper Income Segment 18.4 weeks (compared to 15.4 weeks in 2010), and the High Net Worth Segment 20.6 weeks (compared to 17.8 weeks in 2010).
 
It must be borne in mind that higher income areas normally do have a higher average time on the market than lower income ones, but more significant is that the Upper Income and High Net Worth segments appear to have shown a more significant increase in average time on the market in 2011 than the other two segments.
 
When it comes to financial strength, however, it would appear that the Middle Income Segment, with average price around R1.2m, took the honours when comparing the levels of selling in order to downscale due to financial pressure with selling in order to upgrade, between the different segments.
 
In terms of relative price performances, FNB has created its own area value band indices for residential-dominated areas in the 6 major metros, grouped according to average prices of areas, and using Deeds data for transactions by individuals in the 6 major metro regions with which to estimate these. These indices differ from the 4 estate agent income segment groupings, as they include the entire metro residential market, importantly what are known as former Black, Coloured and Indian Township regions. Since the “relief rally” (or mini-recovery) that we saw in 2010, estimated house price growth in all but one of our Major Metro area value band indices has shown a tapering off.
 
The area value band that appears to have narrowly “defied gravity” in 2011 has been the so-called Affordable Segment, which includes a group of lower-priced metro areas shoes average price was R375,460 in 2011. The Affordable Area Value Band saw estimated average price growth of 6.5% in 2011, mildly higher than the 6.1% recorded for 2010
 
The next 3 higher area value bands were all grouped in a very narrow price growth range in 2011, with the Lower Income Value Band (avg. price = R726,943) showing growth of 4.6% in 2011, what we deem to be “Middle Income Areas” (avg. price = R1.110m) growing by 4.8%, and our Upper End Metro Suburbs (avg. price = R1.87m) rising by 5%. Slightly higher price growth in the higher of the 3 value bands may appear contrary to what agents are saying about the Higher Income segment being fundamentally weaker. However, one should allow some room for statistical error when price growth differences are so small. In addition, the higher segments tend to lack more in terms of pricing realism, implying that while price growth may have been ever so slightly better for those properties transacting in the higher segments, much of the relative market weakness is seen in longer average times that properties stay on the market, i.e. in slower turnaround times rather than in weaker price growth.
 
However, at the other end of the spectrum to the “outperforming” Affordable Segment, an area of noticeable weakness is once again found in our Luxury Area Price Index (avg. price = R2.89m in 2011 with maximum price cut-off of R5m), which is similar in average price to the High Net Worth areas defined by estate agents. This index suggests a noticeable underperformance in this segment compared to the  lower priced value bands, declining on average by -7.6%, following an also underperforming  +2.9% rise in 2010.
 
SO WHAT TROUBLES THE HIGH NET WORTH SEGMENT?
 
The High Net Worth Segment appears to have been the underperformer in the major metro housing market. This is arguably not surprising. The High Net Worth segment is possibly less interest rate sensitive than the lower end of the market, being less credit-dependent than the lower end. One would thus expect the High Net Worth segment to have shown less of a mini-recovery in 2010, given that this recovery was largely driven by massive interest rate cuts. Our perception is that the High Net Worth segment is more “economy-dependent”, with high net worth households receiving greater portions of their overall incomes from business/investment income and discretionary remuneration, which perform weaker in tougher economic times such as those of the past 4 years.
 
Relatively tough financial times in the household sector as a whole should also be expected to drive demand towards the more affordable parts of the market, also benefiting the lower end more. On top of this, the astronomical increases in municipal rates and utilities tariffs bills is sure to be affecting the top end of the market far more severely.
 
The list of possible reasons for the High Net Worth segment’s apparent sub-par performance is therefore lengthy. As we look set to head into a year of slower economic growth in 2012, we would anticipate “more of the same”, i.e. for the lower-priced end of the residential market to show a better relative performance than the higher priced segments. However, we must emphasis that all segments are expected to see something of a slowdown in 2012. In addition, little in the way of further interest rate stimulus is anticipated in 2012, with the Reserve Bank having raised its consumer price inflation forecast to reflect an expectation that the consumer price inflation rate will remain above the 6% target limit for the entire 2012.

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