Cape Town experiencing surge in demand for residential property

Clinton Martle, Western Cape Property Leader Sales Manager at FNB

City of Cape Town Metro estate agents suggest that the Western Cape residential market is in a relatively “good space”, but pricing realism still lacks, according to Clinton Martle, Western Cape Property Leader Sales Manager at FNB.

The 2nd quarter FNB Estate Agent Survey for the City of Cape Town brought about some improvement in the strength of residential property demand, according to the sample of agents surveyed. However, the survey may be hinting at “seller optimism”, keeping prices unrealistically high.

FNB said this was the first time it had seen positive year-on-year growth in the demand rating since the fourth quarter of 2010. “This is also the highest demand rating since the first quarter of 2010‚” the survey said.

However‚ it said‚ an interesting feature of the two indicators of “pricing realism” in the Western Cape was that they appeared to be going in “contradictory” directions.

The first of these indicators was the estimated average time a property stays on the market before being sold. The broad trend in this average has been an “upward drift” since early 2010‚ to a second-quarter average time of 20 weeks.

“This would appear strange at a time when agents perceive demand strength to have improved. Could it be that seller optimism has improved in recent times‚ on the back of their perceptions of an improving market? It would appear so‚ because the second indicator of pricing realism‚ which is the percentage of properties sold at below asking price‚ has shown a significant decline‚ from an estimated 100% in the final quarter of 2011 to 80% by the second quarter of 2012‚” the survey said.

The survey further said one would expect an increasing average time on the market to go hand in hand with an increase in the percentage of sellers having to drop their asking price.

“We will have to watch these two indicators in the coming quarters‚ as there can be some volatility from quarter to quarter‚ but the apparent contradiction can perhaps be explained only by increased seller optimism‚ causing fewer sellers to drop their asking price because they are confident of achieving the price they want‚ and thereby causing the time on the market to remain long‚” it said.

FNB said a third indicator‚ the percentage by which sellers drop their asking price when they have to drop it‚ was estimated at about 10%‚ slightly less than the 11% drop in asking prices of previous quarters. This also suggested a more optimistic attitude in recent times‚ according to the survey.

The survey said more indicators of increased optimism and demand strength were found in buy-to-let buying estimates.

“During and after the recession of 2008-09‚ as financial pressure on the household sector piled up‚ nonessential forms of property buying very much took a back seat‚ and primary residential demand was king. This is still very much the case‚ but there has been some mild improvement in buy-to-let buying‚ suggesting greater confidence and perhaps a gradually improving financial position of a portion of the household sector‚” the survey said.

It said that from a low of 4% of total buying‚ reached in the third quarter of 2010‚ buy-to-let buying in the Western Cape had risen in significance to 14% of total buying as at the second quarter of 2012‚ according to agents surveyed.

The survey‚ however‚ said buying of holiday homes and homes for relatives’ primary residences remained muted.

“But all in all‚ largely as a result of increased buy-to-let buying‚ primary residential buying has slipped back to 82% of total buying as at the second quarter of 2012‚ down from a peak of 93% in the second quarter of 2010‚” it said.

The FNB survey also revealed that first-time buyers had become more significant the market in recent quarters.

“Using a two-quarter moving average to smooth this somewhat volatile data series‚ the second-quarter survey indicated an estimated 21.5% of total buyers being first-time buyers for the two quarters up to and including the second quarter of 2011‚” it said.

The figure was well up from a low of 7.5% as at the third quarter of 2010‚ and reflected the combination of mildly greater confidence levels among first-time buyers‚ who often had the flexibility to remain on the sidelines in bad times‚ but also perhaps reflected slightly easier access to credit compared with 2008-09.

“The upward trend in the percentage of first-time buyers is arguably also reflected in a recent increase in the percentage of single people buying homes‚ and the simultaneous decline in couples’ buying as a percentage of total home buying. From a peak of 90% of total buying in the second half of 2010‚ buying by couples has receded to 75% by the second quarter of 2012‚ the result of younger buyers entering the market in larger numbers as confidence has picked up‚” the survey said.

CONCLUSION

In a nutshell, the picture given by the survey of a sample of estate agents in the Cape Metro is one of further improvement in confidence in the region’s residential property market. This can be seen in the overall Demand Indicator, as well as in other indicators such as 1st time and buy-to-let buying, and increased selling in order to upgrade.

An apparent contradiction in the survey, however, is a further lengthening in the average estimated time of properties on the market, simultaneous with a decline in the percentage of sellers having to drop their asking price. Can it be that sellers are also gaining in confidence, and that this is making them hold out for longer in the belief that they will achieve their asking price? Tough to say as yet, and perhaps another quarter or two of data is required to understand this apparent contradiction.