Still a buyer's market!

Residential demand weakens further
22 Sep 2010



Demand for residential property has weakened again for the second successive quarter in the third quarter (3Q) of 2010 and primary residential buying still predominates.

The 3Q FNB Estate Agent survey showed the sample of estate agents surveyed in 3Q perceived residential demand to have weakened for the second consecutive quarter, after a previous strengthening trend that started in late 2008.

On a scale of 1 to 10, the agent demand activity rating declined from 5,96 to 5,66.

John Loos, property economist at FNB, said while seasonal factors can play a role, year-on-year (y/y) growth in the activity rating also declined from a previous quarter’s +24,4% to 0,2% in 3Q. “This suggests that the slowdown is more than just seasonal.”

What are the causes of this declining demand?

The agents surveyed continued to point to apparent unrealistic pricing in the market. Estimated average time of properties on the market was still a lengthy 15 weeks and 4 days in Q3. “While this is down from the previous quarter’s 17 weeks and 1 day, it would still appear far too long for an average, given that in the healthier market days of 2005/6 the average time was generally below two months,” Loos said.

“Furthermore, the percentage of sellers having to drop their asking price remained stubbornly unchanged from the previous quarter at 81%, and the average price drop for that majority having to drop their prices was estimated at -12%.”

He says all this points to the fact that it is still very much a buyers’ market and that a select group of buyers, who have access to financial resources, generally possess significant bargaining power.

“The existence of a buyers’ market still has much to do with ongoing household sector financial pressure, which restricts demand while also promoting financial pressure-related selling on a very significant scale. Fifty-two percent of agents surveyed believe that household incomes have fallen far behind average house prices. This is well up from the 38% reading in the corresponding quarter a year ago.”

But then there are also restrictions that aren’t market-related. “Agents are increasingly citing tight bank lending criteria or the restrictive National Credit Act (NCA) as being negative factors for the market.”

Perhaps a tell-tale sign of the times, primary residential demand remained high in Q3 and unchanged at 90% of total buying. This is at the expense of non-essential buying, such as buy-to-let, buying for relatives and holiday homes. “Back in 2007, primary residential demand was significantly lower at around 80%.”

In terms of specific groups’ buying trends, previously-disadvantaged groups seem to have held their own while first-time buyers and single are struggling. “On a relative basis, the agent survey suggests that the black population group has maintained their share of suburban home buying, and possibly even increasing it a little in 2010.

“However, as at the beginning of 2007, single people buying property were estimated at 21% of total buyers. This group has diminished to an estimated 13% in the Q3 2010 survey. This is weaker than the 15% recorded in the previous quarter’s survey.

“In contrast to this, couples, expressed as a percentage of total buyers, increased to 87% from the previous quarter’s 85%.”

Loos ascribes this trend to singles being more vulnerable to economic shocks, couples being able to pool their resources together for finance and singles being more flexible than families in terms of renting and moving between properties.

Another buyer group that is showing alarming weakening signs is first-time buyers. “From the previous quarter’s 19%, the percentage of first-time buyers has declined to 15% in the Q3 survey.”

In terms of seller trends, financial pressure crops up again. “Agents continue to estimate the largest percentage to be sellers selling their homes in order to downscale due to financial pressure. This percentage estimate rose from 20% in the 2nd Quarter (2Q) to 25% in Q3 2010 – the first increase since 2Q 2009.

“Simultaneously, the estimated percentage selling in order to upgrade declined mildly from 15% in Q2 to 12% in Q3.”

An encouraging trend is the drop in emigration selling. “The emigration estimate remains low at 6% of total selling, which is down by a percentage point from the previous quarter’s 7%. This is a far cry from the 20% recorded at the height of the 2008 emigration surge.”

All this points to the buyers’ market remaining firmly entrenched, but with both buyers and sellers experiencing financial strain and high debt levels. With residential demand taking pains, sellers – especially those who are under financial pressure – would therefore be well-advised to keep their prices market-related if they have any hope of achieving a reasonably quick sale. – Eugene Brink

Information supplied by Property24